AC -LONG PERSPECTIVE ON A DEVELOPMENT

A CENTURY-LONG PERSPECTIVE ON AGRICULTURAL

DEVELOPMENT

CHRISTOPHER B. BARRETT, MICHAEL R. CARTER, AND C. PETER TIMMER

This article strategically surveys the past century’s literature on agricultural development. We organizethe discussion around three “grand themes” that reveal the richness of agricultural development as anintellectual endeavor. First, we explore the role of agriculture in the broader development process froma macroeconomic and political economy perspective. We then examine the role of technological andinstitutional change in successful agricultural development. Finally, the focus turns to a microeconomicperspective on agricultural household decision making and the problems of imperfect and missingmarkets, asymmetric information, and transactions costs that lead to widespread apparent inefficiencyand disequilibrium.

Key words: Household Models, Institutional Change, Linkages, Structural Transformation,Technical Change.

JEL codes: O1, O3, O4, Q1.

Economists of all stripes have made funda-mental contributions to the field of agricul-tural development. Many Nobel Laureates inEconomics have thought about the field inways that influenced scholarship and practice.But the core of what we know about agri-cultural development has been established byagricultural economists, with some contribu-tions dating almost to the founding of ourAssociation. Still, agricultural development isa younger field than any other in this centenaryvolume. Serious interest began in the 1950s asAfrican and Asian independence movementsgathered force, and an explosion of research inthe 1960s established agricultural developmentas an influential field in both agricultural anddevelopment economics.

It is inevitable then that this chapter has anoticeable contemporary flavor. Several of the“giants” who helped establish the field remainactive. There is a continuing sense of fermentin the field, with few established dogmas, manyunanswered questions and resurgent interestin the wake of the global food price crisis of

Christopher Barrett is the Stephen B. and Janice G. AshleyProfessor of Applied Economics and Management and Interna-tional Professor of Agriculture, Cornell University; Michael Carteris a professor of Agricultural and Resource Economics, Universityof California at Davis; and Peter Timmer is the Thomas D. CabotProfessor of Development Studies, Emeritus, Harvard University.Seniority of authorship is shared equally; authors’ names appearalphabetically.

2007–8. To be sure, we know a lot more thanwe did even fifty years ago. But it is sobering toread the classics from the early 1960s and real-ize how relevant many of their insights remain.Much of what was not known then remainsunknown.

This article strategically surveys the litera-ture in this vast field, highlighting key contri-butions by agricultural economists. We mustmove at a breathless pace; even importantworks are mentioned only in passing. To orga-nize the discussion, we weave the story aroundthree “grand themes” that reveal the richnessof agricultural development as an intellectualendeavor. Following the style of this specialissue, we flag each of these themes and the sub-sidiary main contributions in numbered head-ers, offering a road map of sorts through thevast literature on agricultural development.

We start with the big question: the role ofagriculture in the broader development pro-cess. This macro perspective introduces keylinkages between the agricultural sector andthe rest of the economy, often via the ruralnonfarm economy, and pursues the dynamicevolution of structural transformation. Theeconomic and demographic pathways inher-ent in this transformation present strategicchallenges and opportunities to developmentpolicymakers, which leads to a discussionof the political economy of agricultural pol-icy design and implementation during the

Amer. J. Agr. Econ. 92(2): 447–468; doi: 10.1093/ajae/aaq005Received December 2009; accepted January 2010

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448 April 2010 Amer. J. Agr. Econ.

structural transformation. The discussion ofagricultural development policy provides auseful transition to the second grand theme:therole of technological and institutional changein successful agricultural development.

The critical role of new technologies andeffective institutions in stimulating agriculturalproductivity and inclusive economic growth isnow well established. Although early thinkerssaw this role, subsequent experience andanalysis have clarified the ingredients, theoverwhelming need for public investments—particularly in agricultural research—and theheterogeneity of impact across diverse farmcommunities and households. The role ofintegrated factor and product markets inconditioning this impact and determining theultimate beneficiaries of technical and institu-tional change transitions us to our third grandtheme: understanding how households andindividuals participate (or not) in the processof agricultural development.

This micro perspective on household deci-sion making reveals how much progress hasbeen made since the days when “traditional”peasants were seen as the recipients of “mod-ern” knowledge about farming techniques.Diversity remains crucial in this decision-making process, but imperfect and missingmarkets for risk and finance, thin input andoutput markets, and asymmetric informationproblems and transactions costs that lead towidespread apparent inefficiency and dise-quilibrium explain much of apparently per-verse behavior from poor households thatare vulnerable to devastating shocks to theirlivelihoods.

In conclusion, we argue that the researchon agricultural development over the past fivedecades has raised as many questions as it hasanswered. Such a conclusion leads naturallyto a research agenda, which we briefly framein regional terms as a small recognition ofthe great diversity in agricultural developmentsettings.

Theme 1: Macro-growth dimensionsof agricultural development

All societies have paid considerable attentionto agricultural development and to the localfood security it can provide. Ancient Greece,Rome, and Egypt all produced manuscriptson farm technology, best practices, and evengrain storage rules and techniques. But agri-cultural development as an analytical topic,

with economics as an organizing framework,dates to the rapid emergence of WesternEurope from the late eighteenth century. Eco-nomic historians have documented the crit-ical role of agriculture in the developmentof virtually all the now-rich countries in theworld, an experience drawn upon by W. ArthurLewis when he wrote: “industrial and agrar-ian revolutions always go together, and . . .economies in which agriculture is stagnant donot show industrial development”(Lewis 1954,p. 433).

Contribution #1: Demonstrating that thestructural transformation is the onlysustainable pathway out of poverty

These insights by Lewis stimulated three linesof thought about the role of agriculture ineconomic development. First, the direct out-growth of Lewis’ analysis of dual economieswas formal two-sector modeling (Ranis andFei 1961; Jorgenson 1961), with its focuson structural changes. Hayami and Ruttan(1985) explain how the dual economy liter-ature marked an important break introduc-ing a “dynamic dualism” to replace prior,“static dualism” approaches that had mostlyfollowed a descriptive, sociological, and struc-tural approach. Hayami and Ruttan concludethat neither modeling approach significantlyadvanced the understanding of how agri-cultural modernization actually takes place,although they acknowledge that the modelshelp understand why it is necessary if overalleconomic growth is to take place. “The verysimplicity of the models,a major source of theirinsight into the fundamental process of devel-opment, however, has led to substantial under-estimation of the difficulties that face poorcountries in achieving such a transformation”(Hayami and Ruttan 1985, p. 30).

Second, the macro perspective and theimportance of two-way linkages betweenrural and urban economies were stressed byJohnston and Mellor (1961). Johnston laterbecame increasingly concerned about the sizedistribution of farms and the “uni-modal”lessons from East Asia for Africa and LatinAmerica (Johnston and Kilby 1975; Johnstonand Clark 1982). Mellor continued his focuson South Asia and the difficulties for the agri-cultural sector on its road to industrialization(Mellor 1966; 1976; 1986). Both saw higherproductivity on small farms as the key ingre-dient to rapid poverty reduction and a healthystructural transformation.



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Barrett, Carter, and Timmer Agricultural Development 449

Third, T.W. Schultz (1964) stressed the needfor an “agrarian revolution,” or higher produc-tivity through technical change in agriculture.He emphasized the importance of human cap-ital, especially education of rural workers, infacilitating productivity growth, and govern-ments’ failure to provide appropriate policyenvironments (Schultz 1975; 1978).

Masterfully synthesizing the main lessonsfrom nearly five decades of such analysis,Staatzand Eicher (1998, p.31) explain:

By the end of the 1990s, devel-opment thinking had come nearlyfull circle. In the 1950s and 1960s,many development economists ana-lyzed how the agricultural and nona-gricultural sectors interacted duringthe process of economic growth,using simple two-sector models. Thisabstract theorizing was sharply criti-cized by dependency theorists,amongothers, who argued that such workabstracted from the institutional andstructural barriers to broad-basedgrowth in most low-income coun-tries. During the 1970s and 1980s, thefocus of research shifted to devel-oping a more detailed theoreticaland empirical understanding of therural economy. But the emphasis onstructural adjustment in the 1980sforced reexamination of agriculture’srelationship to the macroeconomy.By the late 1990s, economists wereagain focusing on how the rural econ-omy was linked to the broader worldmarket, but they demonstrated arenewed recognition of how impor-tant institutions are in determining acountry’s pattern of growth and thedistribution of the benefits of thatgrowth.

In the ensuing decade, the profession hasfinally gotten agriculture back on the broaderdevelopment agenda. The publication by theWorld Bank (2007) of the World DevelopmentReport 2008: Agriculture for Development wasa key breakthrough. Coordinated and draftedby Derek Byerlee and Alain de Janvry, thisWDR was the first in a quarter century tofocus specifically on agriculture. Its publicationlate in 2007, just as the world food crisis washeating up, looked prescient. Still, none of themajor donor agencies has figured out how to

gear up quickly to support more spending onagricultural development, partly because thereremains deep uncertainty over what to do andhow to do it.

From a macro perspective, this uncertaintystems from two dimensions of the agricul-tural development process that remain poorlyunderstood: (1) the dynamic role of the ruralnonfarm economy and how it mediates thelinkages between the farm sector and themacroeconomy during the structural transfor-mation; and (2) the political economy of agri-cultural policy and how that too evolves. Bothtopics have received substantial research atten-tion almost from the beginnings of the field,but the research began to show new empiri-cal depth and policy impact by the end of the2000s (Haggblade, Hazell, and Reardon 2007;Timmer 2009).

Contribution #2: Revealing the linkages thatmake an agricultural transformation essentialto overall economic development

Formal two-sector models typically assumedthe smooth functioning of the linkages thatplaced the fate of urban workers and farmersin each others’ hands. The actors who medi-ate these linkages in a real economy, and howtheir role and structure change over the courseof economic development, only became a topicof serious analysis in the 1970s. Then a verita-ble cottage industry sprang up to conceptual-ize and measure the “multipliers” implied bymarket-mediated linkages between agricultureand industry. Haggblade, Hazell, and Reardon(2007) nicely synthesize this literature, stress-ing the crucial and changing role of the ruralnonfarm economy.

The rural nonfarm sector provides the bridgebetween commodity-based agriculture andlivelihoods earned in the modern industrialand service sectors in urban centers. Mostrural households earn a large share of theirincomes from nonfarm sources, and often thissector is the “ladder” from underemploymentat farm tasks to regular wage employmentin the local economy, and from there to jobsin the formal sector (Mellor 2000; Delgado,Hopkins, and Kelly 1998). The firms and activ-ities in the rural nonfarm sector mediatemany of the two-way linkages between agri-culture and the macroeconomy that are at thecore of the development process. These link-ages can be summarized in three categories(Timmer 2002).



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The “Lewis linkages” between agricultureand economic growth provide the nonagri-cultural sector with labor and capital freedup by higher productivity in the agricul-tural sector. These linkages work primarilythrough factor markets, but there is no sug-gestion that these markets work perfectly inthe dualistic setting analyzed by Lewis (1954).Chenery and Syrquin (1975) argue that a majorsource of economic growth is the transfer oflow-productivity labor from the rural to theurban sector. If labor markets worked per-fectly, there would be few productivity gainsfrom this structural transfer, a point empha-sized first by Jorgenson (1961) and later bySyrquin (2006).

The indirect “Johnston-Mellor linkages”allow input–output interactions betweenthe two sectors so that agriculture can con-tribute to economic development. Theselinkages are based on the agricultural sectorsupplying raw materials to industry, food forindustrial workers, markets for industrial out-put, and the exports to earn foreign exchangeneeded to import capital goods (Johnstonand Mellor 1961). As with the Lewis linkages,it is difficult to see any significant role forpolicy or economic growth unless some ofthe markets that serve these linkages operateimperfectly. Resource allocations must beout of equilibrium and face constraints notimmediately reflected in market prices ifincreases in agricultural output are to stim-ulate the rest of the economy at a rate thatcauses the “contribution” from agriculture toexceed the market value of the output, i.e., theagricultural income multiplier is greater thanone (Timmer 1995).

Writing in the mid 1960s, Mosher (1966)assumed that “getting agriculture moving”would have a high priority in national plansbecause of its “obvious” importance in feedingpeople and providing a spur to industrializa-tion. That assumption has held only in parts ofEast and Southeast Asia, and has been badlyoff the mark in much of Africa and LatinAmerica. In the latter regions, a historicallyprolonged and deep urban bias led to a dis-torted pattern of investment. Too much publicand private capital was invested in urban areasand too little in rural areas. Too much capitalwas held as liquid and non-productive invest-ments that rural households use to manage risk.Too little capital was invested in raising ruralproductivity.

Such distortions resulted in strikingly differ-ent marginal productivities of capital in urban

and rural areas (Lipton 1977; Timmer 1993).New growth strategies—such as those pursuedin Indonesia after 1966, China after 1978, andVietnam after 1989—altered investment prior-ities in favor of rural growth and benefited fromthis disequilibrium in rates of return, at leastinitially. For example, in Indonesia from themid 1960s to the mid 1990s,real value added perfarm worker increased by nearly half, whereasit had apparently declined from 1900 throughthe mid 1960s. In China, the increase from 1978to 1994 was nearly 70%, whereas this mea-sure had dropped by 20% between 1935 and1978 (Prasada Rao, Maddison, and Lee 2002).A switch in investment strategy and improvedrates of return on capital increase factor pro-ductivity (and farm income) by improvingefficiency in resource allocation.

The contribution of agricultural growth toproductivity growth in the nonagriculturaleconomy stems from several other sources aswell: greater efficiency in decision making asrural enterprises claim a larger share of out-put; higher productivity of industrial capital asurban bias is reduced; higher productivity oflabor as nutritional standards are improved;and a link between agricultural profitability(as distinct from agricultural productivity) andhousehold investments in rural human capi-tal, which raises labor productivity and alsofacilitates rural–urban migration. These mech-anisms capitalize on the efficiency of ruralhousehold decision making, the low opportu-nity cost of their labor, the opportunity foron-farm investment without financial interme-diaries, and the potential to earn high rates ofreturn on public investments that correct forurban bias. In combination, these mechanismstranslate faster agricultural growth into mea-surably faster economic growth in aggregate,after controlling for the direct contribution ofthe agricultural sector to growth in GDP itself(Timmer 2002).

Contribution #3: Developing the empirical andtheoretical understanding for why allsuccessful structural transformations arepainful for farm households and thus generatea reasonably standard political response toreduce that pain

The agricultural transformation

The structural transformation is the defin-ing characteristic of the development pro-cess, both cause and effect of economicgrowth (Syrquin 2006). Four relentless and



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interrelated processes define the structuraltransformation: a declining share of agricul-ture in GDP and employment; rural-to-urbanmigration that stimulates urbanization; the riseof a modern industrial and service economy;and a demographic transition from high birthand death rates common in backward ruralareas to lower ones associated with betterhealth standards in urban areas. The final out-come of the structural transformation is aneconomy in which capital and labor produc-tivity in agriculture is equalized with other sec-tors through well-functioning labor and capitalmarkets.

As Chairman Mao crudely but correctlyput it, “the only way out for agriculture isindustry.” Unless the nonagricultural economygrows, there is little long-run hope for agricul-ture. At the same time, the historical recordis very clear on the key role that agricultureplays in stimulating the nonagricultural econ-omy (Timmer 2002).This feedback has sparkeda long-contested literature on the role of agri-culture in economic development (Johnstonand Mellor 1961; Hayami and Ruttan 1985;Mundlak 2000; Timmer 2002; 2009).

Part of the controversy stems from the struc-tural transformation, a general equilibriumprocess not easily understood from within theagricultural sector. Over long historical peri-ods, agriculture’s role seems to evolve throughfour basic stages (Timmer 1988): the early“Mosher”stage when“getting agriculture mov-ing”is the main policy objective (Mosher 1966);the “Johnston-Mellor” stage when agriculturecontributes to economic growth through a vari-ety of linkages (Johnston and Mellor 1961);the “Schultz” stage when rising agriculturalincomes fall behind those in a rapidly growingnonfarm economy, inducing political tensions(Schultz 1978); and the “Johnson” stage wherelabor and financial markets fully integrate theagricultural economy into the rest of the econ-omy (Johnson 1997; Gardner 2002). Efforts to“skip” the early stages and jump directly toa modern industrial economy have generallycourted disaster.

In the early stages there is typically a sub-stantial gap between the share of the laborforce employed in agriculture and the share ofGDP generated by that work force. This gapnarrows over time as incomes rise; the con-vergence reflects better integrated labor andfinancial markets. But this structural gap oftenwidens during periods of rapid growth, as isevident in the history of OECD economies(Timmer 2009). When overall GDP grows

rapidly, the share of agriculture in GDP fallsmuch faster than the share of agricultural laborin the overall labor force. The turning point inthe gap generated by these differential pro-cesses, after which labor productivity in thetwo sectors begins to converge, has also beenmoving “to the right” over time, requiring pro-gressively higher per capita incomes before theconvergence process begins.

This lag inevitably presents political prob-lems as farm incomes visibly fall behindincomes earned in the rest of the economy.The long-run answer is faster integration offarm labor into the nonfarm economy, includ-ing the rural, nonfarm economy. But suchintegration takes a long time. It was notfully achieved in the United States until the1980s (Gardner 2002),and the productivity gapappears increasingly difficult to bridge througheconomic growth alone (Timmer 2009). Lag-ging real agricultural earnings growth fostersdeep political tensions over the course of thestructural transformation, and those tensionsgrow with the lag. The standard governmentresponse to these tensions has been to pro-tect the agricultural sector from internationalcompetition and ultimately to provide directincome subsidies to farmers (Lindert 1991).

The political economy of agricultural policy

Modern political economy has its roots deep inagriculture. Explaining the evolution of agri-cultural policy has long been difficult for mod-els that use democratic institutions, medianvoters, or other forms of representative gov-ernance. Two aspects of agricultural policy areespecially puzzling: the “development para-dox,” whereby the sector is discriminatedagainst when a large share of the populationworks in agriculture but is protected when thenumber of farmers becomes much smaller; andthe“trade paradox,”whereby both agriculturalimports and exports are taxed. Neither of thesepatterns makes sense in a democratic societywhere rational voters elect officials who defendtheir interests.

Consequently, policy analysts and politi-cal theorists have long tried to understandwhose interests officials defend and why. Olson(1965), Bates (1981),Anderson (1986), Lindert(1991) and Krueger, Schiff, and Valdes (1991)documented trends in historical biases andoffered explanations based in “positive” polit-ical economy that explains public policy for-mation based on the assumed self-interested



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rationality of policymakers. Bates (1998, pp.238–9) explains:

“I have moved away from a formof analysis which views policy as theresult of efforts to maximize the socialwelfare. I have moved instead to aset of approaches that looks at pub-lic policy as a solution to politicalproblems. The general theme . . . isthat politicians are rational actors,but they are solving problems thatdo not take a purely economic form.What appear as economic costs mayoffer political benefits: noncompeti-tive rents or inefficient projects, forexample, may be politically attractivein that they offer tools for buildingloyal organizations. What economistsmay evaluate as bad policy, then, isnot necessarily the result of poortraining, obduracy, or other deficien-cies on the part of policy makers.Rather, policy makers may simplybe solving a different problem thanare economists. As policy analysts,it behooves us to represent explic-itly the political problem as per-ceived by the policy maker and touse our analytic techniques to solveit, both in order to offer betterexplanations of government behaviorand to advocate better policy moreeffectively.”

So what drives the decisions of theseself-interested policymakers? De Gorter andSwinnen (2002) provide a long list of fac-tors found empirically to influence agriculturalpolicies over time and across space. They iden-tify four key elements that political economymodels of agricultural policy have considered:individual preferences of the citizenry; collec-tive action by lobby groups; preferences ofpoliticians; and political institutions. In theend, de Gorter and Swinnen conclude thatthe extensive empirical work on agriculturalpolicies needs to be better integrated into polit-ical economy theory. The difficulty with thisintegration, however, is that the current the-ory is built almost exclusively on neoclassicalfoundations that have dubious assumptionsabout how individuals behave in the face ofuncertainty and economic change. Two of themost pervasive policy tendencies have beenfor governments to stabilize their staple food

prices and to provide price protection to asector with lagging incomes. Both tendenciesare hard to explain within the neoclassicalparadigm, but are obvious political choicesfrom a behavioral perspective if most indi-viduals base welfare judgments on “referencepoints”, and so dislike instability. Similarly, ifindividuals judge incomes based on relativestanding, then lagging incomes generate directpolitical pressures for assistance.

Contribution #4: Establishing that individuals’and nations’ food security status dependsfundamentally not only on supply-side factorsassociated with agricultural productivity, butequally with demand factors related toincomes, risk exposure, health status, socialprotection policies, and caregiving within thehousehold, and is best conceptualized andmeasured as a stochastic, dynamic status

Some of the most politically charged foodpolicies relate to those that protect lives andlivelihoods. For most of human history, liveswere short and unhealthy due in large mea-sure to insufficient nutrient intake. Malthus’well-known explanation was that human pop-ulation growth routinely overtaxed the earth’scapacity to provide sufficient food, lead-ing to regular famines. Since the eighteenthcentury, however, dozens of countries haveescaped widespread hunger and prematuredeath due largely to dramatic advances infood availability and associated income growthbroadening access to a satisfactory diet. Theapparent reinforcing feedback between nutri-tional status and productivity has led sev-eral scholars to hypothesize that the escapefrom the nutritional poverty trap helpedto catalyze the unprecedented rapid andwidespread advance of living standards overthe past 300 years (Dasgupta 1993, 1997;Fogel 2004).

Much of this progress stems from greaterfood availability made possible by agriculturaltechnological change associated with plantbreeding, improved agronomic practices suchas intercropping and crop rotations, irrigation,and the emergence of mechanical implementsand chemical fertilizers. Food security hastherefore often been equated with food avail-ability, typically measured in terms of satisfac-tion of dietary energy requirements, such ascalories per person per day, such that food inse-curity arises due to insufficient and unstableproduction.



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An availability-based view of food securitynaturally leads policymakers to pursue foodself-sufficiency strategies, to ensure domesticproduction will suffice to feed the population.But food self-sufficiency strategies neglect eco-nomic laws of comparative advantage basedon factor endowments, and typically lead tohigher prices as well as greater inefficiencyand environmental damages than does inter-national trade (Anderson 1986; Krueger et al.1991; Johnson 1997).

The second generation of thinking on foodsecurity stems directly from Sen (1981, p.1,emphasis in original), whose famous open-ing sentences underscore that “starvation isthe characteristic of some people not havingenough food to eat. It is not the character-istic of there being not enough food to eat.While the latter can be a cause of the for-mer, it is but one of many possible causes.”Ironically, Sen eschewed the concept of foodsecurity, focusing instead on the “entitlements”of individuals and households. Sen shifted thefocus from supply-side issues associated withaggregate food availability toward individualaccess to food, and thus to the role of (perhapsidiosyncratic) demand failure due to unem-ployment, adverse movement in the terms oftrade, production failure, termination of trans-fers, or other forms of “entitlement failure.”Sen thus placed increased emphasis not onlyon traditional economic variables of incomesand prices, but equally on human rights andon the legal institutions of the state, as wellas the moral and social norms of cultures.This perspective mirrored the renewed atten-tion paid to institutional issues in technologydevelopment and diffusion, and in agriculturalcommercialization.

The emergent third-generation view of foodsecurity builds on food availability and accessmeasures to introduce more explicit atten-tion to risk, dynamics, and the complex healthconsequences of nutrient deficiencies (Barrett2002). By expanding the conceptualization offood insecurity beyond production, prices, andincomes, the literature of the past decade or somore closely relates food insecurity to poverty,to social, economic, and political disenfran-chisement, and to structural patterns of controlover (financial, human, and natural) resources,and of access to markets, technologies, andfinance (Drèze and Sen 1989). But with dozensof countries still lacking adequate food avail-ability to meet the dietary needs of theirresidents, even if distribution were perfectlyequitable, long-standing concerns about food

production per capita maintain their currencyin the twenty-first century.

Theme 2: Meso-level processes oftechnological and institutional change

It borders on the tautological to say thatlow-income countries are saddled with rudi-mentary technologies that are both causeand consequence of low incomes. Moderngrowth theory focuses heavily on technologi-cal change as an engine of economic growth,and on externalities as a source of endogenousgrowth (Solow 1957; Lucas 1988). Elegant asthese models might be, they typically assumethat processes of technology development andadoption, and market exchange are exoge-nous, irreversible, and relatively frictionless. Incontrast, the micro-level agricultural develop-ment literature paints a picture of slow, halting,reversible, and ultimately incomplete adoptionof improved inputs or production technolo-gies, which, coupled with incomplete marketparticipation and price transmission, impedeproductivity growth and slow structural trans-formation in agriculture.

Contribution #5: Understanding theproductivity and distributional imp-acts of technical change in agriculturaldevelopment

Technical change in agricultural development

What drives the emergence of more produc-tive technologies for low-income agriculture?The dominant theory has long been the inducedinnovation model of Hayami and Ruttan(1985) and Binswanger and Ruttan (1978).Under the induced innovation hypothesis,technical innovations are guided by changesin relative incentives. As an input becomesdearer relative to prospective substitute inputs,there emerges a profit incentive to develop atechnology that makes relatively greater useof the cheaper input and less of the dearerone. The hypothesis of induced innovationsuggests that Hicks-biased technical change iscausally driven by changes in relative pricesthat induce either profit-seeking innovation byprivate firms or political demands for pub-lic research to relieve increasingly bindingconstraints.

The empirical evidence on the induced inno-vation hypothesis is somewhat mixed,however,and at present, no general theory of technical



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change really exists (Ruttan 1997). Some dis-coveries are stochastic, and path dependencysometimes seems to lock in even relatively inef-ficient technologies (David 1985;Arthur 1994).At the same time, many agricultural techno-logical breakthroughs – perhaps especially theGreen Revolution advances in improved riceand wheat germplasm in the 1960s and 1970s—emerged not from profit-seeking induced inno-vation but rather from scientific researchfollowing the non-profit motives of philan-thropists, scientists, and governments.

Such investment is justified by the siz-able externalities associated with innovation(Ruttan 1980; 1997). These spillover benefitstake two major forms. First, because agricul-tural research generates nonrival—and oftennon-excludable—knowledge, it yields classicpublic goods benefits that justify public invest-ment. Although much adaptive agriculturalresearch is highly specific to particular agro-climatic regions, the resulting genetic materialand especially basic research has had substan-tial international spillover effects (Alston et al.2000; Evenson and Gollin 2003). Hence thehigh estimated annual rates of return on pub-lic (and non-profit) agricultural investment,typically in the 30–60% range both for individ-ual commodities or factors of production andfor total research systems (Alston et al. 1996,Raitzer and Kelley 2008).

The second major spillover effect arises fromthe “technology treadmill” inherent in agri-culture (Cochrane 1958; Gardner 2002). In asmall open economy in which producers faceinfinitely elastic demand, the gains from tech-nological change accrue entirely to producersin the form of higher profits. By contrast, ifdemand is perfectly inelastic, all gains accrueto consumers in the form of lower prices. Thedistribution of welfare gains from technicalchange therefore depends crucially on the priceelasticity of demand for the product. Sincemost agricultural products exhibit price inelas-tic demand, producers in aggregate tend notto benefit much in long-run equilibrium fromtechnological change. Producers adopt newtechnologies because they reduce unit costs,thereby increasing productivity. But in generalequilibrium, when many producers adopt thecost-reducing technology, the aggregate sup-ply curve shifts and prices fall. Producers canwind up being worse off if demand is suf-ficiently inelastic. The empirical evidence ontechnical change in agricultural developmentsuggests that most welfare gains are capturedas consumer surplus due to lower prices, rather

than in producer surplus (Evenson and Gollin2003; Minten and Barrett 2008). Of course, ifthe benefits from technical change in agricul-ture largely accrue to consumers in the formof lower prices, it may be socially optimal topay for much technology development with taxrevenues paid by consumers.

T. W. Schultz, human capital and the “poorbut efficient” hypothesis

If W. Arthur Lewis built the intellectualframework supporting the “why” of agricul-ture’s role in economic development, T.W.Schultz built the framework for understand-ing the “how” of stimulating agriculture toplay that role. Schultz came to developmentissues after a distinguished career analyzingproblems withAmerican agriculture,especiallyinstability (Schultz 1945) and poverty (Schultz1953). His classic volume on agricultural devel-opment, Transforming Traditional Agriculture(Schultz 1964) grew directly out of these earlieranalyses.

Schultz had long been convinced that theproblem of poverty in American agriculturestemmed from the intersection of rapid tech-nical change, the industrial organization ofthe sector, and its dependence on an unsta-ble macroeconomy to determine its outputprices. The solution was to be found in greatermacro stability (outside the agricultural sec-tor’s purview) and greater capacity of farm-ers to adjust to change, both on the inputside—new technologies—and to the pricesof output. In Schultz’s view, new technol-ogy was the essential driver of higher farmincomes, but only in the context of new invest-ments in human capital on the farm. Hefamously rejected the notion that small farm-ers were poor due to cultural characteristics,deeming them instead “poor but efficient”users of long-established technologies and lim-ited available factors of production. Farmersneeded new knowledge and skills to adoptnew technologies, but also to cope with chang-ing economic environments, especially withthe need to exit agriculture as farm produc-tivity increased and the structural transfor-mation proceeded. Transforming TraditionalAgriculture stresses both elements as thekeys to a successful agricultural developmentstrategy.

Schultz’s “poor but efficient” hypothesissparked much debate around the importanceof technology development to expand the



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production possibility frontier for poor farm-ers versus improving productivity within theexisting production frontier. Widespread esti-mates of considerable technical inefficiencyamong small farmers have often fueled argu-ments that investment in new technologiesmight not be as valuable as investment inextension services to increase adoption andimprove the use of existing technologies (Aliand Byerlee 1991). An opposing thread ofthe literature notes the many econometricproblems inherent in the technical ineffi-ciency research and demonstrates that, as onebegins to control for exogenous, stochasticenvironmental factors which influence produc-tivity, apparent inefficiency diminishes appre-ciably and becomes essentially untargetablebased on farm or farmer characteristics, sup-porting Schultz’s hypothesis (Barrett 1997;Sherlund et al. 2002).

Contribution #6: Building an understanding ofthe dynamics of technology adoption anddiffusion

Because technical change seems key to—arguably even the main driver of—agriculturaldevelopment, understanding remarkably het-erogeneous patterns of technology adoptionand diffusion has been a major preoccupa-tion of agricultural development researchers.Much of the literature traces back to the semi-nal work of Griliches (1957), who documentedthe now-standard S-shaped diffusion curve instudying the adoption of high-yielding cornvarieties in the United States. Since that time,a large literature has focused on understand-ing better who will adopt a given technol-ogy, especially who will adopt first because,given the technology treadmill, the benefits ofinnovation accrue disproportionately to earlyadopters.

So who adopts first? In general, those withthe most to gain, the lowest-cost access to thetechnology, and the lowest evaluation costsand least uncertainty about the technology.Precise hypotheses depend crucially on thespecification of the adoption model and localcontext (Feder, Just, and Zilberman 1985).But in general, large farm operators adoptbefore smallholders. Agricultural technologi-cal change can thereby contribute to wideninginequality within agriculture, although gen-eral equilibrium food price and wage effectseventually offset such effects for landless rurallaborers and small, net buyer farmers who

sell surplus labor to larger neighboring farms(David and Otsuka 1994).

Several candidate explanations exist as towhy large farms seem to adopt new tech-nologies first. One is scale-biased technicalchange. If technology development occurs notdue to induced innovation but rather to politi-cal research prioritization, smaller, more vocalgroups of large landowners using inherentlydifferent production technologies and per-haps growing different crops might steer pub-lic research efforts toward technologies mostlikely to benefit them disproportionately (deJanvry 1981).

Even with scale-neutral technical change,larger farms might acquire technologies ear-lier due to superior credit and insurance access.If informational asymmetries and repaymentenforcement problems induce creditors torequire land or other real assets as collateral,then borrowing constraints will be an increas-ing function of landholdings (Feder 1985;Carter 1988). If the new technology demandsincreased input purchases, then borrowingconstraints may bind, with larger landownersfacing a lower shadow price of capital thansmallholders, making the effective acquisitioncost of the new technology lower. Similar argu-ments apply to risk bearing capacity if riskaversion is declining in farmer wealth. Theeffect of financial market imperfections canbe magnified by fixed or sunk costs to tech-nology adoption, which privilege scale. Simplemodels of technology choice in the presence offinancial market failures thus underpin manypoverty trap models (Azariadis and Stachurski2005; Carter and Barrett 2006).

Another possibility is that large farms aremore likely managed by well-educated oper-ators or visited by extension agents promotingthe new technology, and that human capi-tal and information flow are the key driversof technology adoption (Schultz 1975). Thisview is consistent with renewed recent empha-sis on learning models of technology adop-tion in which farmers update their informa-tion on a technology, and refine their skillsand efficiency applying the technology as theyuse it (Antle and Crissman 1990). Producersable to afford the costs and risks of exper-imentation therefore adopt earlier. The lit-erature has focused anew on the dynamicsof agricultural technology diffusion (Besleyand Case 1993), particularly on processes oflearning by doing and learning from others(Bandiera and Rasul 2006; Conley and Udry[forthcoming]; Foster and Rosenzweig 1995;



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Moser and Barrett 2006). This more recentthread of the literature highlights, in particu-lar, the empirical challenges of disentanglingwealth,education,and social network structureas causal drivers of technology adoption anddiffusion.

Contribution #7: Establishing ways ofmeasuring the degree to which individuals andhouseholds participate in local markets and, inturn, local markets with broader national andglobal ones, and with what effects on behaviorand welfare

Exploitation of comparative advantage so as toreap gains from market-based exchange is asmuch an engine of agricultural developmentas technological progress. Economists datingback at least toAdam Smith and David Ricardohave trumpeted the static and dynamic wel-fare gains from trade. Further, macroeconomicpolicies commonly require smooth markettransmission of signals sent by governments.And well-functioning markets pool demandand supply shocks across markets, enhancingproducer incentives to adopt improved tech-nologies and dampening price risk exposurethat can prove catastrophic for food-insecurepeoples (Ravallion 1997).

In low-income rural settings, however, poorcommunications and transport infrastructure,limited rule of law, and restricted access tocommercial finance often sharply limit thedegree to which markets function as effectivelyas highly stylized models typically assume.Agricultural economists have contributed sig-nificantly to the literature documenting theinstitutional constraints to market develop-ment (Fafchamps 2004; Lin and Nugent 1995).The notion that state-controlled markets areallocatively inefficient undergirded most liber-alization efforts in the 1980s and 1990s. Butas economists have gradually come to appreci-ate the array of institutional failures that limitmarket performance, it has become increas-ingly clear that private markets may likewise becharacterized by considerable allocative ineffi-ciency. In particular, the agricultural develop-ment literature has documented considerablecommodity price variability across space andtime in developing countries, typically find-ing significant forgone arbitrage opportunities(Fackler and Goodwin 2001). In exploringsuch puzzles, agricultural development schol-ars have innovated extensively in spatial priceanalysis methods,dating from Jones’ (1972) use

of correlations in price time series to deter-mine the extent of markets in west Africa,to Ravallion’s (1986) pre-Granger introduc-tion of error correction modeling to studyprice transmission in response to shocks inthe Bangladesh famine of 1974, to Baulch’s(1997) introduction of the parity bounds modelto study food market performance in thePhilippines.

The analytical similarities between technol-ogy adoption choices and market participationchoices are striking, although largely over-looked. If a production technology is quasi-concave and monotone, then exchange fits thegeneral characteristic of a technology. In boththe technology adoption and market partic-ipation cases, fixed costs play an importantrole, mirroring their importance to more gen-eral theories of imperfect competition and ofmultiple equilibriums and poverty traps. AsRomer (1994) points out, when trade restric-tions or marketing costs effectively extinguishmarkets beneath some critical threshold, effi-ciency losses in poor economies can becomequite large. This point builds on the Johnston-Mellor (1961) hypothesis because in the pres-ence of fixed and sunk costs, exogenous pro-ductivity gains can make the emergence ofentire sectors profitable, leading to very largesocial returns to investment in the upstreamsector.

Given the apparent massive static anddynamic gains from trade, it seems puzzlingthat many rural households opt out of marketexchange for many goods and services. Mar-ket participation choices revolve around thetension between gains from specialization andcorresponding increases in transactions coststhat result from depending more on the marketto procure one’s needs. Transactions costs varywith social distance from counterpart transac-tors and economic distance from trading points,where this distance is defined over space, timeor form. Fixed and variable costs are thereforehousehold-specific and endogenous. Peopleknow exchange is costly and choose productionand exchange strategies recognizing that theyimplicitly also choose transactions costs. Thishelps explain why some farmers forgo yield-increasing technologies and opt for activitydiversification,not for reasons of self-insurancebut rather because of demand for consump-tion variety in the face of costly commerce(Omamo 1998). For many, autarkic behavioris a low-level equilibrium (de Janvry et al.1991; Goetz 1992; Key et al. 2000; Bellemareand Barrett 2006). Increased engagement in



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the commercial agricultural marketing systemis therefore a central feature of agriculturaldevelopment, both cause and consequence ofproductivity growth and improved standards ofliving among rural households.

Of course, the commercial agricultural sys-tem itself has been undergoing a significanttransformation over the past several decades.The rapid emergence in developing countriesof supermarkets, fast food chains, and otherretailers with downstream market power, aswell as increased penetration by global agro-exporters, has shortened supply chains andtightened food quality and safety standards,while at the same time threatening to leavesmall farmers behind because of the high trans-actions costs involved (Reardon et al. 2003;Swinnen 2007; Reardon et al. 2009).

Theme 3: Microeconomics of AgriculturalDevelopment

In the first quarter of the twentieth cen-tury, Russian agricultural economist A.V.Chayanov published The Theory of Peas-ant Economy (1965). Rediscovered by post-war development economists eager to under-stand the choices and constraints that shapewhether and how individuals participate inagricultural growth and development, theChayanovian model became the corner-stone for the microfoundations of agriculturaldevelopment.

Contribution #8: Developing and empiricallytesting an integrated model of householddecision making under a wide variety ofconstraints, including limited access to credit,labor and land markets, as well as risk anduncertainty.=

Chayanov set out to understand the resourceallocation logic of peasant householdsthat operated as integrated production–consumption units in a world with thin oreven nonexistent markets for land and labor.Absent those markets to provide well-definedopportunity costs for land and labor,Chayanovargued that the peasant household allocateslabor such that the “drudgery” associatedwith the additional labor input just equalsthe marginal utility of the additional outputattainable with that labor input. FollowingSen (1966), the household sets the marginalvalue product of labor equal to the marginalrate of substitution between consumption and

leisure, which can be naturally interpreted asthe shadow price of labor, a function of thedemographic structure of the household, itspreferences and its endowments.

Several core propositions emerge fromChayanov’s model. First, changes in house-hold demographic structure that decrease theshadow price of labor (e.g., an increase in thenumber of consumers) will lead to an intensifi-cation of production and an increase in outputper unit land. Second,a household with a lowerland endowment will have a lower shadowprice of labor and produce more per unit area.This latter effect implies the inverse relation-ship between farm productivity and farm sizethat has been central to debates on land reform,as discussed below.

In Chayanov’s model, production choicesare not separable from consumption choices.However, if instead of missing markets weassume all markets are perfectly competitive(and that hired and family labor are perfectsubstitutes) then household consumer andproducer choices become mathematicallyseparable. In production, the household willallocate resources like a profit-maximizingfirm, equating the marginal value of product oflabor to the market wage. Having maximizedits income, the household then allocates itsfull income between consumption of goodsand leisure according to its preferences anddemographic structure.

Singh, Squire, and Strauss (1986) make clearthat ‘non-separable behavior,’ in which house-holds use resources differently with differentproductivity levels, is fundamentally a resultof missing or imperfect markets, so that pricesare not parametrically given to the house-hold, rather than a reflection of the fact thatthe household is an integrated production andconsumption unit. Indeed, such differentiatedbehavior can result in models in which theconsumption decisions of the household arecompletely ignored. For this reason, such mod-els are ‘endowment sensitive,’ meaning thatthe intensity with which the household usesand abuses its natural and human resources isinfluenced by its relative wealth.

The household model and its implicationshave been the empirical workhorse of devel-opment microeconomics. The Singh–Squire–Strauss volume emerged as agricultural priceswere liberalized in many developing coun-tries, with the expectation that agriculturalproduction and market supply would buoy-antly follow price increases. However, thenon-separable Chayanovian model accurately



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predicted muted supply response as priceincreases induce a compensating rise in theshadow price of labor, choking off productiongrowth. Even when markets are complete andseparability holds, the elasticity of marketedsurplus can be markedly lower than that ofoutput as income effects can lead the house-hold to auto-consume a large share of theprice-induced increase in output.

The relationship between farm productiv-ity and farm size implied by the Chayanovianmodel induced massive empirical investiga-tion. Beginning with Indian farm managementstudies in the late 1950s to the Berry andCline (1979) compendium, through to studiesthat utilized ever more complex econometricmethods, this relationship has been investi-gated in every world region. While the find-ing of an inverse relationship has been fairlyrobust, dissonant findings have helped spawntwo other important advances in the economicsof agricultural development: the endogeneityof market failure, and the centrality of capitalconstraints as agricultural technology becomesmore complex.

The first of these advances results from crit-ical reflection on the assumption that landand labor markets are completely absent. Con-sider what happens if labor markets exist,so that labor time can be freely boughtand sold at a given wage, but that agencycosts make the productivity of hired laborless than that of own family labor. Underthis assumption, households with land endow-ments so small that hiring in labor becomesunprofitable face a constant wage, and behaveaccording to the predictions of the sepa-rable model. Households with more landbegin to hire in labor, but face an increasingmarginal cost of labor, creating an inverse farmproductivity–farm size relationship. Carter andYao (2003) label this phenomenon “local” non-separability, and suggest that proper empiricalaccounting for the endogeneity of market fail-ure would help make sense out of the inchoateempirical literature on farm productivityand size.

Endogenous market failure and local non-separability relate closely to work on marketparticipation and transactions costs discussedearlier. In a paper aptly subtitled “para-doxes explained,” de Janvry et al. (1991) showthat because transactions costs drive a wedgebetween producer and consumer prices, somehouseholds may fall into a non-participationregime in which they neither purchase norsell the goods they produce. Because they

do not face parametrically given prices, suchhouseholds exhibit behaviors associated withthe non-separable Chayanovian model, includ-ing sluggish response to price incentives. Whilede Janvry et al. (1991) ignore the endogene-ity of market participation, subsequent workby Key et al. (2000) and Bellemare and Barrett(2006) explores the endogeneity of market par-ticipation decisions in the face of fixed andvariable transactions costs, and draws out itseconometric implications.

The second advance that emerged fromthe inconsistent evidence on the relationshipbetween farm productivity and size has beena deeper reconsideration of the role of cap-ital in small-scale farming. While the simpleChayanovian model ignores purchased inputs,the advent of the Green Revolution revealedthe tenuousness of this assumption. Authorsbegan to ask whether the increasing impor-tance of purchased inputs, and small farmers’inability to access them because of market orfinancial constraints, might erode the inverserelationship.

Contribution #9: Showing how incomplete andthin markets, in the presence of transactionscosts, influence technology adoption, on-farmproductivity and welfare dynamics

Buttressed by ample descriptive evidencethat working capital to purchase inputs wasscarce and expensive in low-income agricul-tural economies, a literature grew up aroundthe concern that capital constraints retard ratesof growth and development. In an impor-tant contribution, Feder (1985) explored theimpact of wealth-biased access to capital on theinverse farm size–farm productivity relation-ship, showing that if capital access improvedwith (collateralizable) land endowments, thenthe relationship between farm productivity andsize could become positive even in the pres-ence of the classic Chayanovian land and labormarket failures.

The seemingly obvious solution to this prob-lem of scarce and expensive agricultural capi-tal was to impose interest rate ceilings, oftenaugmented by the creation of public devel-opment banks that offered agricultural loansat concessional interest rates. Unfortunately,this experiment in public sector banking ledto high default rates and a pattern of unsus-tainable lending that required annual infu-sions of capital. The influential USAID SpringReview of Small Farmer Credit (Donald 1976)documented this situation and became the



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foundation for the “Ohio State” critique ofrural financial market interventions (Adamset al. 1984). Buttressing this critique were thearguments that observed ‘usurious’ interestrates simply reflected the real costs of lend-ing to small farms, and that well-intentionedefforts to assist with interest rate restrictionscaused small farm credit to dry up completelythrough the operation of what Gonzalez-Vegacalled the iron-law of interest rate restrictions(Gonzalez-Vega 1984).

Even as the influential Ohio State critiquemoved policy toward laissez faire principles, asecond generation of analysis influenced by theeconomics of imperfect information (Stiglitzand Weiss 1982) questioned what a laissez fairecredit market equilibrium would look like inlow-income agriculture. Carter (1988) showedthat even a laissez faire credit equilibrium mayexclude the small farm sector because lendersworried about the adverse consequences ofmoral hazard and adverse selection engage innon-price rationing (i.e., imposing their owninterest rate ceilings) that leads to wealth-biased credit rationing of the sort Gonzalez-Vega attributed to government intervention.Binswanger and Rosenzweig (1986) added theimportant observation that covariant risk inagriculture further suppresses the develop-ment of deep agricultural loan markets inrisk-prone, rainfed, low-income agriculturalsectors.

Although its theoretical foundations areclear, the empirical relevance of non-pricerationing in agricultural credit markets hasremained a matter of dispute. One streamof econometric work has tried to identifycredit constraints by estimating whether creditmarket interventions created returns in excessof the market price of capital. While theanswer has generally been yes, even studiesthat control for non-random participation incredit programs (e.g., Sial and Carter 1996)may be confounding the impact of relaxingcredit constraints with the intrinsic productiv-ity of those farms that choose to participate incredit programs.

More generally, empirical efforts to iden-tify the importance of credit constraints havestruggled with a fundamental identificationproblem. Without additional information, itis unclear whether farms with no loans havezero demand for credit because such farmshave cheaper sources of finance or simplyhave no productive investment projects,or zeroloan supply because of non-price rationing.One approach to this problem has been

to employ the econometrics of unobservedregime switching, in which the probability thata farm is in the zero demand or the zero sup-ply regime is simultaneously estimated withthe parameters of the demand and supplyfunctions (Kochar 1998; Bell, Srinivasan, andUdry 1999).

Feder et al. (1990) pioneered anotherapproach that has since become labeled “con-straint elicitation” (Boucher et al. 2009). Inthis approach, ancillary questions about creditapplication and demand are used to separatenon-borrowing households into those with andthose without (unmet) credit demand. Oncethis sample separation is attained, more con-ventional econometrics can then be employedto estimate the incidence and impact of non-price rationing in credit markets. Evidencebased on this approach suggests that perhaps40% of small farms suffer productivity lossesrelated to non-price rationing in credit markets(World Bank 2007), figures generally in linewith the literature that employs unobservedregime switching econometrics.

If there is at least imperfect evidence thatcredit constraints limit the productivity andincome of small farmers, then the question ofwhat to do about it retains its importance. The‘microfinance revolution’ that employed novelincentive and contractual devices to enhancethe credit access of collateral-poor householdsin the urban sector has had more modestimpact on agricultural credit. This outcome isnot surprising given that microfinance lend-ing principles are undercut in agriculture bythe preponderance of covariant risk. One res-olution to this problem might be to use thesort of index insurance contracts discussed byHazell (1992) to remove the covariant riskfrom the system, with the expectation thatthis can crowd-in credit supply from micro-finance and other lending institutions. Whilethere are now several experiments underwayto test this proposition, its effectiveness has yetto be proven.

Contribution #10: Understanding how andwhy state efforts to change the nature of rightsin land cause improved credit, productivity,security and welfare outcomes, and for whomthey do not and why

While the basic Chayanovian household modelsuggests that small, family labor farms will havea productivity advantage in the face of landand labor market imperfections, wealth-biasedcapital access creates a countervailing market



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failure that potentially offsets this advantage.Feder’s (1985) work on countervailing mar-ket failures was closely followed by generalequilibrium analysis that asked whether andhow productivity is influenced by the distri-bution of land among rural households whenthere are imperfections in both labor and capi-tal markets (Eswaran and Kotwal 1984). Theirnumerical analysis shows that an economy withhigh land inequality will indeed produce lessthan an economy with a more equal land dis-tribution. They also show that a credit marketreform that equalizes access to capital acrossfarm households will have an effect similar toland redistribution.

These analyses reopened a long-standingdebate about redistributive land reform. Muchas the rural finance group at Ohio State playeda key role in influencing policy on agricul-tural credit, the Land Tenure Center (LTC) atthe University of Wisconsin played an impor-tant role in land reform policy in the 1960sand 1970s. LTC’s work was predicated on theChayanovian notion that small farms weremore productive than large farms, and henceredistribution of land and from the large tosmall holders would improve economic perfor-mance and enhance social equity.Two books byPeter Dorner (1970; 1992) nicely capture thespirit of this argument.

Redistributive land reform, of course,proved politically contentious, with some ofthe more ambitious redistribution programsimplemented as part of political coups orsocial revolutions.The economics of redistribu-tive reform also came under attack by thosewho doubted the capacity of small farms tohandle the capital and risk requirements ofmodern agriculture. Ironically, some of themore ambitious redistributive reforms in LatinAmerica (Chile, Cuba, El Salvador, Nicaragua,and Peru) converted large-scale private farmsinto large-scale cooperative or state farms(rather than redistributing land to smallhold-ers) because reform administrators doubtedthe productive capacity of smallholders. Asdiscussed in Thiesenhusen (1989), these coop-erativist reforms in most instances eventuallydecollectivized and shifted to smaller-scale,family farms, as also happened to similar farmsin China and in much of Eastern Europe andthe former Soviet Union.

Empirical work such as Lin (1992) on China,and Macours and Swinnen (2002) on East-ern Europe,finds substantial productivity gainsaccompanied the eventual shift to smaller-scale farming. At a policy level, recent years

have seen a renewed interest in redistributivereforms, although this time with redistributionpursued through market-assisted programs, inwhich beneficiaries receive grants that allowthem to purchase land from large-scale farm-ers (Deininger 2001). Market-assisted reformsremain based on a Chayanovain logic thatsmall farmers’ superior productivity impartcompetitive advantage in land markets. Whilesuch programs have been implemented in sev-eral places (most prominently in Brazil andSouth Africa), the evidence on their effective-ness remains thin.

The growing literature on the security ofproperty rights over land held by farmers hasbeen closely intertwined with debates overland reform. Feder et al. (1988) found thatpolicies that enhanced the formal, legal tenuresecurity of Thai farmers offered substantialpayoffs in the form of increased investmentand enhanced productivity. Such payoffswere hypothesized to arise due to interac-tions between credit supply effects (whichoccur if legally titled land offers improvedcollateral to agricultural lenders) and invest-ment demand effects (which occur if legaltitle increases farmers’ willingness to makelong-lived investments as they are assured orrecouping the benefits of up-front investmentcosts over a longer time horizon). Influencedby these arguments, property rights reformpolicies quickly became and remain a stapleof agricultural development policies.

The empirical evidence on these policies hasbeen mixed, especially in areas of Africa char-acterized by customary tenure systems (Bruceand Mighot-Adholla 1994). In these circum-stances, property rights reform policies repre-sent an individualization (or redistribution) ofrights as well as change in the legal status ofrights already held. An especially careful studyfinds no evidence of an investment effect inBurkina Faso, and suggests that the custom-ary tenure system was not insecure and thatthe rural financial system was unresponsive tothe putative increases in the collateral value ofland (Brasselle, Gaspart, and Platteau 2002).

In a study in a Latin American econ-omy with better-functioning credit markets,Carter and Olinto (2003) separately identi-fied the credit supply from the investmentdemand effect. They found that the latterapplied to everyone, but that the credit sup-ply only expanded for medium- and larger-scale farmers, with the net result that propertyrights reform had substantial impacts for onlyrelatively advantaged farmers. Evidence on



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the effectiveness of these programs contin-ues to trickle in (Deininger and Jin 2006) butremains subject to serious econometric attri-bution problems that may benefit from impactevaluation based on randomized program roll-outs now being attempted by the MillenniumChallenge Corporation. Overall, agriculturaleconomists have made a major contribution toimproved understanding of the role of propertyrights in economic development.

Contribution #11: Risk arising from multiplesources is omnipresent in rural areas,especially in agriculture, and householdstherefore actively manage such risk, sometimesin ways that may trap them in chronic poverty,in the absence of more effective riskmanagement instruments

As discussed throughout this section, imper-fect markets mean that household technol-ogy and other choices are fundamentallyshaped by wealth endowments. At a theoreti-cal level, these core insights have been basedon static models, taking household endow-ments as given. Of course, household endow-ments of land, labor,and financial assets evolveendogenously over time. Perhaps householdscan use time as an additional degree of freedomto work around imperfect markets, by build-ing up their own savings to offset non-pricerationing in credit markets. If they can, thenthe endowment sensitivity explored by agri-cultural economists from Chayanov to Dornerto Feder to Binswanger might be a transi-tory phenomenon. Tackling this question witha dynamic general equilibrium analysis, Carterand Zimmerman (2000) find that, indeed, timecan erase the impact of initial land ownershipinequality on economic performance, althoughthe transition is slow and costly.While provoca-tive, the Carter-Zimmerman analysis ignoresthat time also introduces risk. Analysis of thedynamics of accumulation without attention tothe economics of risk seems incomplete.

Risk and its impact on decision making hasplayed an important role in the economics ofagricultural development, especially from thepioneering work of Hans Binswanger mea-suring risk aversion in India and studyingits impact on technology choice (Binswanger1980; 1981). Perhaps one of the more impor-tant observations by Binswanger and his col-laborators was that risk mattered most notbecause different individuals varied in theirdegree of subjective risk aversion, but becausethey differed in their access to credit and other

financial markets that could be used to mediaterisk (Binswanger and Sillers 1983).

Under the assumption that income was gen-erated by a stationary process (i.e., capitalwas not needed to produce income), Deaton(1991) showed that a modest amount of riskcould be managed through the maintenanceof a stock of savings which could be used tosmooth consumption in the face of incomefluctuations and credit constraints. Subse-quent studies extended the Deaton model toconsider the savings and accumulation deci-sions of credit-constrained agricultural house-holds that needed capital in the productionprocess.

One of the most important implications thatemerged from this literature is the prospectof multiple dynamic equilibriums or povertytraps. As discussed by Carter and Barrett(2006), there are several types of dynamic mod-els in which risk and capital constraints cometogether to create a poverty trap, understoodas an initial wealth threshold below which thehousehold will optimally settle into a low-level dynamic equilibrium. Households thatbegin with endowments above that thresh-old will optimally move toward a higher-levelequilibrium. The implications are potentiallyprofound because a poverty trap suggests thatan unequal agrarian asset distribution whichleaves large numbers of households below thecritical asset threshold will stagnate and yieldhigh levels of persistent poverty. Uninsuredrisk in the face of a poverty trap also has farhigher costs than suggested by static models.While empirical evidence of the existence ofpoverty traps in low-income rural economiesremains modest (Lybbert et al. 2004; Barrettet al. 2006), the poverty traps hypothesis isalready motivating a reexamination of theindex insurance ideas of Peter Hazell (1992),Jerry Skees, and others to see if sufficientrisk can be removed from low-income agricul-tural systems to alter fundamental poverty trapdynamics (Barnett et al. 2008).

Contribution #12: Establishing models andevidence that underscore how failure to lookwithin the household at intra-familydistributional and behavioral heterogeneity,especially with respect to gender, can be asimportant an oversight as failure to look withina macroeconomy at interhouseholdheterogeneity of behavior and well-being

The basic household model treats utilityas a function of the per capita levels of



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consumption and leisure. Such representa-tions are only valid to the extent that intra-household inequality in the distribution ofgoods is trivial. While interhousehold inequal-ity is clearly non-trivial, growing evidence thatintra-household inequality can also be non-trivial sparked the growth of a literature, andeventually policies, focused on intra-householddistribution.

Drawing on Philippine data, Folbre (1984)provocatively argued that observed patternsof intra-household inequality were hard torationalize with any model that assumed benef-icent maximization of a unified, family util-ity function. Building on the nascent intra-household bargaining literature (e.g., McElroyand Horney 1981), analysis of the rural house-hold in developing countries began to exploremodels that replaced the unified maximandof the Chayanovian model with a house-hold bargaining function based on individualutility functions and threat points based onthe assets that the individual can carry awayfrom the household should it dissolve, as wellas the external legal and social environmentthat shapes individuals’ ability to use thoseassets.

Even assuming that household members canmake and costlessly enforce bargains overall resource allocation decisions, this individ-ualized or deconstructed household modelsyields a number of important insights. Chiefamong these are that interventions influenc-ing the exit option of one household membermay affect the intra-household distribution ofgoods. For example, interventions that enhancemen’s legal and economic control over landresources in an effort to enhance ‘householdwelfare’ may actually weaken women’s bar-gaining power and decrease their and theirchildren’s well-being. As a consequence of theweight of the theoretical and empirical evi-dence built up around this point (Haddad et al.1997; Quisumbing 2003), a number of ruraldevelopment policies have been designed withthe intra-household bargaining equilibrium inmind. Examples include efforts to assure thatboth men and women benefit from land titlingprograms (Deere and León 2001), as well asefforts to target social transfers to women withthe expectation that enhancing women’s eco-nomic endowments improves child outcomesbecause women’s preferences favor childrenrelative to men’s preferences.

Linking back to a core thread of the agricul-tural development literature, intra-householdbargaining can also result in inefficient

production patterns in the sense of failureto equalize returns to factors of productionallocated among different household produc-tion activities (Jones 1983; Udry 1996). Whilethese production-side issues have proven dif-ficult to study, the preponderance of evidencethat bargaining matters for household expendi-ture priorities continues to shape and reshapea broad range of agricultural interventions inlow-income countries.

An agricultural development research agendafor the twenty-first century

Agricultural development has regained promi-nence in global development and foreign policydebates after decades in intellectual and polit-ical exile. At a fundamental level, however,the core research questions have changed lit-tle over the past half century. The challengefor scholars is to theorize rigorously while con-textualizing appropriately in order to generateempirically defensible models that can helpexplain, even shape and accelerate, the struc-tural change necessary for a billion-plus peopleto escape chronic poverty and hunger. Thespecifics of an appropriate research agendavary, however, so we chart a course forward byregion.

Asia

East and Southeast Asia are often held upas examples of how to modernize agricultureon behalf of a broader development agenda.Certainly, agricultural productivity has risenrapidly in much of Asia in the past half cen-tury, and rates of hunger and poverty havefallen sharply. There are many positive lessonsfrom Asia on how to “do” agricultural devel-opment. Yet much remains to be done on thisbasic agenda, and the problems of success raisefurther research issues. In particular, manag-ing a rapid structural transformation presentstransition problems that need to be solved in ageneration or two, not the century or longerthat most OECD countries had. The coex-istence of millions of small-scale farms withmodern industrial and service sectors is fraughtwith economic and political challenges. Canthese small farms be integrated efficiently intomodern supply chains? Will substantial consol-idation be needed, requiring even faster urbanjob creation? No blueprints exist as to howthe rural nonfarm sector might absorb many ofthe workers presently engaged on small farms.



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Thus there is a growing recognition that thefuture of rural development in Asia may belargely through urban development.

Rural poverty remains endemic in muchof South Asia, where issues of land tenure,access to modern inputs and technology, andinstitutions capable of managing price andyield risk are still prominent on the researchagenda. In East and Southeast Asia, ruralpoverty remains significant in regions that areisolated from mainstream economic activitiesor face serious resource constraints and poorwater control. In these regions, the researchagenda looks strikingly similar to that forAfrica.

Africa

Africa is the one continent on which the shareof population living in extreme poverty or suf-fering hunger has not fallen in a generation.It is also the only major world region not toenjoy any appreciable growth in food produc-tion per capita over the same period, in spite ofthe fact that Africa remains the most rural ofthe inhabited continents.

The core challenges in Africa thus revolvearound identifying the sources of rural povertytraps and effective intervention points forunlocking the continent’s agricultural poten-tial. Having been largely bypassed by theGreen Revolution, what is the most effectivemeans to stimulate technical change, enhancedmarket participation,and productivity growth?What are the tradeoffs between targetinghigher potential agro-ecological zones withbetter market access versus areas that havebeen less favored by both nature and gov-ernments? What institutional changes are atonce politically feasible,socioculturally accept-able, and economically and environmentallysustainable means of igniting pro-poor growth,especially in the rural nonfarm economy, so asto reduce the pressures of excessively rapidurbanization now felt in many African coun-tries? Given the threat posed by expectedincreases in climate variability over the comingcentury, and continued commodity price andpolitical instability on the continent, what newmechanisms can be devised to help vulnerableAfricans cope with considerable, even growing,risk exposure? Finally, as Africa’s natural capi-tal is being rapidly depleted through soil, forest,and biodiversity losses,and with only 7% of cul-tivated area under irrigation, what can be doneto improve natural resources management soas to enable and sustain productivity gains?

Perhaps, because Africa has seen the leastprogress in the half century or so since agri-cultural development research became vibrant,the essential research agenda there has evolvedleast.

Latin America

With the exception of a few countries, most ofLatin America is now urbanized, with some75% of the population living in cities, andless than 10% of GDP emanating from agri-culture. At the same time, the poor residedisproportionately in rural areas, and the con-tinent continues to struggle with its legacyof agrarian inequality. While a generationof redistributive land reform policies man-aged in some cases to reduce that inequal-ity, Latin America has yet to develop thesmall farm-friendly market and institutionalstructures that facilitated agricultural devel-opment and a smooth agrarian transition inEast Asia. Without those structures, new agri-cultural growth opportunities—be they basedon exports or on supplying domestic supermar-ket chains—will likely bypass if not squeezeout the small farm sector, as has happened inthe past.

A central question facing agricultural pol-icymaking in Latin America is whether it isworthwhile to enhance the competitiveness ofthe small farm sector or even to expand itssize through asset transfers or other redis-tributive measures. Some argue that it is not,and that rural poverty is best managed withconditional cash transfers that address inter-generational poverty transmission by facilitat-ing children’s human capital formation. Othersargue that novel efforts to manage risk andfacilitate the emergence of a financial sec-tor able to deal with small farm agricultureare within reach and well worth the effortin terms of their capacity to achieve broadlybased growth. An even bolder step wouldbe to push further with market-assisted landreform as a mechanism to redress rural povertythat is perhaps more cost-effective than cashtransfers.

The responses to these challenges will surelydiffer over time and between the differentregions that comprise Latin America. In themeantime, as in all the world regions, theeconomics of agricultural development willcontinue to support those responses withan understanding of what makes agriculturaleconomies function and dysfunction.



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