Doc Mm Aec 515 Powerpoint Notes January 2012

TOPIC 1: REVIEW OF PRINCIPLES OF GROWTH ANDDEVELOPMENT AN OVERVIEW

• The dominant feature of Less Developed Countries comparedwith the rest of the world is their relative poverty

• Relative poverty is a dominant feature of LDCs• In this course we shall focus on both theory and techniques• These skills will enable us to evaluate policy implications• The first step is to distinguish between LDCs and DCs with

respect to the following attributes:• Structure and organization of agriculture• The behavior of agricultural producers

1

POVERTY AND ECONOMIC DEVELOPMENT

• Poverty is a key characteristic of traditional agriculture which is alsothe predominant form of agriculture in LDCs

• The major causes of poverty include:• Inadequate access to land and capital for the majority of the farmers

and technological backwardness• In order to defeat poverty we need to tackle the two issues above• Agriculture per se is fraught with risks and uncertainties particularly

in fragile LDC economies hence the need for policy measures toreduce the risks and uncertainties

• Development theory postulates a progression from dominant primaryproduction in agriculture to dominance in manufacturing industry

• Thus poverty reduction or elimination is central to EconomicDevelopment

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TOPIC 1: REVIEW OF PRINCIPLES OF GROWTH ANDDEVELOPMENT

• Less Developed Countries economic crisis presents an extraordinarychallenge to the development community i.e. both intellectuals andpolicy makers

• Most LDCs have embarked on comprehensive programs of economicadjustment over the past few decades

• These include fundamental structural changes in both the agriculturaland non agricultural sector

• The idea is to transform these LDCs’ economies and make them morecompetitive in an increasingly competitive world

• In order to achieve food security, provide jobs and register a modestimprovement in living standards LDC’s must grow by at least 4 to 5% annually

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REVIEW OF PRINCIPLES OF GROWTH ANDDEVELOPMENT

• Sustained growth will require efforts to protect the environment• To this effect at least agriculture will be seen as the main

foundation for growth• The key to development will be to develop and apply new

technologies as well as to slow population growth• We recognize that sound macro economic policies and efficient

infrastructure are essential to provide an enabling environmentfor the productive use of resources

• However they in themselves are not sufficient to transform thestructure of LDC economies

• Macro economic policies are therefore necessary but notsufficient in providing an enabling environment

4

REVIEW OF GROWTH AND AGRICULTURAL ANDRURAL DEVELOPMENT

• Capacity building in human resources is key to thestrengthening of institutional framework within whichdevelopment can take place

• It is the milieu within which development can take place• One of the root causes of weak economic performance in the

past has been the failure of the public institutions• Private sector initiative and market mechanisms are important

but they must go hand in hand with good governance• Regional cooperation and integration like the African Union,

Common Market for Eastern and Southern Africa and SouthernAfrica Coordination Committee are key towards thedevelopment of African economies

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SCOPE AND NATURE OF AGRICULTURAL AND RURALDEVELOPMENT

• Africa as a whole has over the years witnessed almost adecade of falling per capita incomes

• The question is does Africa face special structural problems• More fundamentally is there a long term vision that is both

credible and energizing?• In order to understand this we need to perhaps look at a brief

historical perspective of the LDCs story

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HISTORICAL PERSPECTIVE

• Historically overall economic growth in Sub Saharan Africahas averaged 3.4% a year since 1961

• This represents only a fraction above the population growthrate

• By 1987 the region of about 450 million people had a totalGross Domestic Product of around $135 billion about the sameas that of Belgium which had only 10 million inhabitants

• The growth was unevenly spread across countries• Between 1961-72 income per capita grew• 1973-80 was a period of stagnation• 1981-87 were years of decline

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HISTORICAL PERSPECTIVES

• Africa’s deepening crisis is characterized by• Weak agricultural growth, decline in industrial output, poor export

performance, soaring debt and deteriorating social indicators,institutions and the environment

• Agriculture has grown annually by less than 1.5% on averagesince 1970 with food production rising more slowly thanpopulation

• Industry grew by three times as fast as agriculture in the firstdecade of independence since then deindustrialization has set in

• Since 1970s export volumes have barely grown with Africa’sshare in the world markets falling by almost half

• This paints a sorry picture for Africa’s development as well as thedevelopment of other LDCs

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TWO VIEWS TO DEVELOPMENT ABOUT PEASANTFARMERS

• One view is that despite their poverty, peasant farmers areallocatively efficient

• An opposing view to this is that because of poverty, riskminimization takes precedence over profit maximization

• Those who believe in the poor but efficient view believe thattechnological advance is virtually the sole means of raisingoutput and incomes in peasant agriculture

• However opponents of this view believe that significantincrease in output can be achieved through more efficient useof existing technology

• The upshot is that progress can be achieved by doing both i.e.improving production incentives as well as by encouragingfarmers to make better use of present technique

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TWO VIEWS TO DEVELOPMENT ABOUT PEASANTFARMERS

• Gross inequality in the distribution of ownership of land givesrise to the demand of land reforms

• Land reform is regarded as a precondition for agriculturaldevelopment

• Note that more land redistribution of ownership is necessarybut not sufficient to transform agriculture

• What is needed is a more comprehensive agrarian reform• This should tackle issues of extension, credit and marketing

services (a holistic approach)

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TWO VIEWS TO DEVELOMENT ABOUT PEASANTFARMERS

• Due to high population density, it is quite unrealistic to viewland reform as a panacea for abolishing rural poverty andunemployment

• You need to boost other sectors, like creating better nonagricultural employment opportunities

• You also need to focus on the macro economy and not only theagricultural sector in order to resolve the problems

• The role of credit in agricultural development is especiallyimportant in facilitating the adoption of more appropriatetechnology to raise productivity

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WHAT IS DEVELOPMENT?

• Quote 1 “While humanity shares one planet , it is a planet onwhich there are two worlds, the world of the rich and the worldof the poor ” (Raanan Weitz, 1986)

• Quote 2 “23% of the world’s people earn eighty five percent ofthe world’s income. In 1990 the richest 20 % of the world’spopulation were getting 60 times more income than the poorest20%.” United Nations Development Report, 1992.

• The above quotes will help us define what development is• Development can be defined as the sustained elevation of an

entire society and social system towards a better and morehumane life

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WHAT IS DEVELOPMENT?

• The core values of development represent common goals soughtby all individuals and societies

• These are sustenance ,self esteem (sense of worth), freedomfrom servitude and freedom to choose

• Development must have the following three objectives:• To increase the availability and widen the distribution of basic

life sustaining goods such as food , shelter ,health etc• To raise levels of living standards i.e. higher incomes, better

jobs, education and greater attention to cultural and humanisticvalues

• To expand the range of economic and social choices available toindividuals and nations

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ECONOMIC GROWTH VERSUS ECONOMICDEVELOPMENT

• Economic growth refers to the increase of a specific measuresuch as real national income, GDP or per capita income

• It is a positive change in the level of production of goods andservices by a country over a certain period of time

• Nominal growth is defined as economic growth includinginflation

• Real economic growth in defined as nominal growth minusinflation

• It is a period when business activity surges or grows• Economic growth is the increase in the value of goods and

services produced by an economy

ECONOMIC GROWTH VERSUS ECONOMICDEVELOPMENT CONTINUED

• Economic growth in its broadest sense encompasses two majorareas;

• Policies that Governments undertake to meet broad economicobjectives

• Policies and programs to provide infrastructure job creationand services

• Economic Development refers to a sustainable increase inliving standards

• Thus economic growth of any specific measure is not asufficient definition of economic development

• Economic development includes economic growth plusstructural changes in the economy

CLASSIFICATION OF DEVELOPING COUNTRIES

• The United Nations uses the Human Development Index(HDI)

• The HDI incorporates demographic and social indicators• The United Nations uses three major groups• Least developed nations, comprising 44 poorest countries• Non oil exporting developing countries, comprising 88

countries• Petroleum rich members of Oil and Petroleum Exporting

Countries (OPEC) comprising 13 countries

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ORGANIZATION FOR ECONOMIC COOPERATION ANDDEVELOPMENT (OECD) AND WORLD BANK

CLASSIFICATION

• Low income countries (LICS) i.e. those with 1990 per capitaincome of less than $600 comprising 61 countries

• Middle Income Countries (MICS) comprising 73 countries• 13 members of OPEC• The World Bank divides 125 countries (both developed and

developing with population in excess of 1 million ) into 4categories according to their per capita income levels

• Low income• Middle income• Upper middle income and• High income

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ORGANIZATION FOR ECONOMIC COPERATION ANDWORLD BANK CLASSIFICATION

• The first three comprise 101 countries, mostly from developingcountries and the last group consists of 24 countries

• Most third world economies share common goals. These are:• Reduction of poverty, inequality and unemployment• Provision of minimum levels of education, health ,housing and

food• The broadening of economic and social opportunities• Common problems shared by these countries include:• Chronic absolute poverty, high and rising levels of

unemployment and under employment, wide and growingdisparities in the distribution of income and low and stagnatinglevels of agricultural production etc 18

COMMON CHARACTERISTICS OF DEVELOPINGCOUNTRIES

• Low levels of living• Low levels of productivity• High rates of population growth and dependency burdens• Significant dependence on agricultural production and

primary product exports• High degree of vulnerability in international relations

(Georgia, Zimbabwe ,Somalia, Afghanistan etc)

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EXTENT OF POVERTY

• The magnitude and extent of poverty depends on two factors:• The average level of national income• The degree of inequality in its distribution• Absolute poverty represents a specific minimum level of

income needed to satisfy the basic physical needs of food,clothing and shelter

• See figure 2.4 on page 43 Todaro ‘ People living in absolutepoverty 1989(estimated) Source: United Nations PopulationFund , Population Resources and the Environment, The criticalchallenge (New York UNFP 1991),p16

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LOW AGRICULTURAL PRODUCTIVITY

• Agricultural productivity is low in LDCs because agriculturein these countries is characterized by

• primitive technologies,• poor organization and• limited physical and human inputs• Technological backwardness persists because third world

agriculture is predominantly peasant farming• Lack of ownership of land. Most peasants rent land thus no

economic incentives for output and productivity improvements

21

LEADING THEORIES OF ECONOMIC GROWTH

• Post world war 2 literature on economic development hasbeen dominated by 4 major and sometimes competing strandsof thought;

• The linear stages of growth model• Theories and patterns of structural change• The international dependency revolution and• The neoclassical free market counter revolution• In the past few years we have witnessed the emergency of a

new fifth approach associated primarily with the so callednew theory of economic growth

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LINEAR STAGES OF GROWTH MODEL

• Theorists of the 1950s and early 1960s viewed the process ofdevelopment as a series of successive stages of economicgrowth through which all countries must go through

• They believed in an economic theory of development in whichthe right quantity and mixture of savings investment andforeign aid were all that was necessary to enable third worldnations to proceed along an economic growth path that hadbeen followed by now developed nations

• The linear stages approach was largely replaced in the 1970sby two competing economic schools of thought

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THEORIES AND PATTERNS OF STRUCTURAL CHANGE

• This approach used modern economic theory and statisticalanalysis in an attempt to portray the internal process ofstructural change that LDCs must undergo

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INTERNATIONAL DEPENDENCY REVOLUTION

• This approach was more radical and political in orientation• It viewed under development in terms of international and

domestic power relationships• It also views underdevelopment in terms of institutional and

structural economic rigidities and the resulting proliferation ofdual economies and dual societies both within and amongnations of the world

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SUMMARY OF THE DEPENDENCE THEORIES

• Dependence theories tended to emphasize external and internalinstitutional and political constraints on economicdevelopment

• Emphasis was based on the need for major new policies toeradicate poverty, provide more diversified employment andreduce income inequalities

• Economic growth per se was not given the excellent statusaccorded to it by the linear stages and the structural changemodels

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THE NEO CLASSICAL COUNTER REVOLUTION

• In the 1980s we had a fourth approach emerging. This was theNeo Classical Counter revolution

• This emphasized the beneficial role of free markets, openeconomies and privatization of inefficient enterprises

• According to this theory government intervention andregulation were the key to failure to development

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ISSUES IN AGRICULTURAL AND APPLIED ECONOMICS

• International trade has often played a crucial though notnecessarily a benign role in the historical development of LDCs

• Primary products have accounted for a sizeable proportion ofindividual GNP from (25% to 40%) in some of the smallernations

• GNP is derived from the overseas sale of agriculture and otherprimary products

• Most LDCs depend on non mineral primary product exportsfor the vast majority of their foreign exchange earnings

• Markets for these products are largely unstable, hence primaryproduct export dependence carries with it a degree of marketrisk and uncertainty that few nations desire. 28


• In addition to the export dependency many LDCs relygenerally to an even greater extent on the importance of rawmaterials, machinery and capital goods, intermediate producergoods and consumer products to fuel their industrial expansionand satisfy the rising consumer aspirations of their people

• For most non petroleum rich developing countries e.g. Malawi,import demand has increasingly exceeded the capacity togenerate sufficient revenues from the sale of exports

• This has led to chronic deficits in the balance of paymentsposition vis avis the rest of the world

• In a number of LDCs severe deficits on current and capitalaccount s have led to rapid depletion of their internationalmonetary reserves and a slowdown in Economic growth 29


• Thus a chronic excess of foreign expenditures over receiptscan significantly retard development efforts

• It can also greatly limit a poor nation’s ability to determine andpursue its most desirable economic strategies

• By opening their economies and societies to world trade, thirdworld countries invite not only the international transfer ofgoods, services and financial resources but also thedevelopmental or anti developmental influences of the transferof technologies, technological, economic, social and culturaltransfers

• The volume, value and structure of world trade has undergoneconsiderable change over the past three decades

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• The principal reason for the 1980s contraction of real exportsafter a rise in the 1960s and 1970s include:

• The effects of the severe global recession (general downturnin economic activities) of the 1980s which was followed by anextended period of slow economic growth

• The extraordinary rise and fall of the value of the US dollari.e. fluctuation of the US currency

• The continuous decline in the third world commodity prices• The rise of protectionism in the developed countries• The on going debt crisis throughout Latin America , Asia and

Africa31


• Faced with these problems, many LDCs have had to curtailimports as part of fiscal and monetary austerity measures

• This has in turn led many (LDCs) to experience a slow downin overall economic growth, a rise in unemployment and ageneral increase in the incidence of severe poverty

• Most LDCs still depend heavily on their exports of primaryproducts whereas the developed nations export primarilymanufactured goods

• We can observe why export performance of the majority ofLDCs have been relatively weak compared with the exportperformance of rich countries

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• This relates to the concept of elasticity of demand• Most statistical studies of world demand patterns of different

commodity groups reveal that in the case of primary productsthe income elasticity of demand is relatively low

• The percentage increase in quantity demanded will rise by lessthan the percentage increase in national income

• By contrast for fuels and manufactured goods, incomeelasticity is relatively high

• For example it has been empirically estimated that a 1%increase in developed country incomes will normally raisetheir import of foodstuff by 0.6%

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ISSUES IN AGRICULTURAL AND APPLIED ECOMNOMICS

• Agricultural raw materials such as rubber and vegetables by0.5%, Petroleum and other fuels by 2.4%, Manufactured goodsby 1.9%

• Consequently, when incomes rise in rich countries theirdemand for food , food products and raw materials from thethird world nations goes up relatively slowly whereas theirdemand for manufactured products , the production of which isdominated by the developed countries goes up very rapidly

• Finally , the concentration especially in Africa of exportproduction on relatively few major non cereal primary productssuch as tobacco, cocoa tea etc renders them vulnerable tomarket fluctuations in the prices of specific products

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• Nearly half the third world nations earn over 50%of theirexport receipts from a single primary product

• About three quarters of the third world nations earn 60% ormore of the export receipts from no more than three primaryproducts

• Significant price variations for these commodities can renderdevelopment strategies highly uncertain

• This explains the birth of international commodity agreements

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TERMS OF TRADE

• The question of changing relative price levels for differentcommodities brings us to another important quantitativedimension of the trade problems faced by third world countries

• The total value of export earnings depends not only on thevolumes of these exports sold abroad but also on the price paidfor them

• If export prices decline, a greater volume of exports will haveto be sold merely to keep total earnings constant

• Similarly on the import side , the total foreign exchangeexpended depends on both the quantity and the price ofimports (Check the J curve effect and elasticity marshalllerner conditions)

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TERMS OF TRADE CONTINUED

• Clearly if the price of a country’s exports is falling relative tothe prices of the products it imports, it will have to sell thatmuch more of its export product and enlist more of itsproductive resources

• This will be merely to secure the same level of imported goodsthat it purchased in previous years

• In other words the real or social opportunity cost of a unit ofimports will rise for a country when its export prices declinerelative to its import prices

• Economists describe the relationship or ratio between the priceof a typical unit of exports and the price of a typical unit ofimports as the commodity terms of trade: Px/Pm where Px andPm represent export and import price indices respectively 37

COMMODITY TERMS OF TRADE

• The terms of trade are said to deteriorate for a country ifPx/Pm falls i.e. if export prices decline relative to importprices even though both may rise

• A good deal of the argument against primary productexpansion and in favor of diversification into manufacturedexports for developing countries during the 1950s and 1960swas based on the secular deterioration of the non oilcommodity terms of trade

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POLICY MARKETS AND PUBLIC ACTION GOVERNMENTINTERVENTION AND ROLE OF MARKETS AND

INSTITUTIONS GHATAK CHAPTER 5 p90

• Today mainstream debates about development in poor countriesare centered on globalization of economic policies andinstitutions and issues such as privatization and sustainability

• There are two views with regard to modern economic growth(Yujiro Hayami)

• The first is the community yoke thesis . This considers thetraditional institutions in pre capitalist and pre industrialistcommunities to be the feudal yokes preventing realization ofboth the economic and moral potential of mankind

• In this philosophy the market is efficient in resource allocationand provides the rules of justice

• Free market is the easy way forward39


INSTITUTIONS

• The second view is that called the evil market thesis• In this view the morals that are considered necessary for the

efficient functioning of market economy are based on contractsamong free individuals such as honesty, trust and restraint

• These are issues that are not learnt from commerce and marketbut are virtues nurtured through social interaction inprecapitalistic communities bound by common religion andmutual love

• Since the traditional virtues are undermined by market forcesbased on the unrestricted release of self interest and materialsocial greed the capitalist market system is demoralizing henceself destructive

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INSTITUTIONS

• Governments should expand their efforts in the spheres inwhich both the community and markets fail to achievesocially efficient resource allocation

• To this effect, government should try to supplement rather thanreplace indigenous community and market systems

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MARKETS, MARKET FAILURES AND DEVELOPMENT• One key question in development is how can we account for

differences in the levels of income and rates of growth betweenthe developed and less developed economies

• The 1950’ and 60s answer was that the poor are like the richexcept they are poorer, have less human and non human capital

• Therefore the solution was to increase the resources of LDCseither by transferring capital to them (either direct aid oreducation) or by encouraging them to save

• Today the answers are less convincing than they did two decadesago

• If the problems were primarily a shortage of physical capital , thereturn to capital should be much higher in LDCs than in DCs andthe natural avarice (tendency or balance of capitalists would leadto a flow of capital from the more developed to the LDCs

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MARKETS, MARKET FAILURES AND DEVELOPMENT

• Secondly if the problem was primarily a shortage of humancapital, then the educated in LDCs would receive a higherabsolute as well as relative) income than the educated in DCs

• How then can we account for the higher levels ofunemployment among the educated and the migration of theeducated from LDCs to more developed economies

• In order for us to answer this let us discuss why markets do notwork in LDCs

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WHY MARKETS DO NOT WORK IN THE WAYHYPOTHESISIZED BY NEOCLASSICAL THEORY

• A. Learning and information: Knowledge is like a public good• 1.Among the commodities for which markets are most

imperfect are those associated with knowledge and information(Stiglitz 1987b)

• 2.Learning by doing : LDCs find it impossible to acquire thelearning of the DCs given their initial disadvantage they findit optimal to specialize in technologies or products with lowerlearning potentials (risk minimizing behavior)

• B. CAPITAL MARKETS• The problem of adverse selection, moral hazard and contract

enforcement imply that even in developed economies marketsdo not look like perfect markets 44

WHY MARKETS DO NOT WORK IN THE WAYHYPOTHESIZED

• In Adverse selection between buyers and sellers• In moral hazard there is an increased risk of problematical

(immoral) behavior and thus a negative outcome because theperson who caused the problem doesn’t suffer the fullconsequences or may actually benefit

• B : PRODUCTS• Informational imperfections affect producers directly and

indirectly through their effect on consumers• Imperfect information (asymmetry of information) is one the

reasons why most developed countries as well as LDCs facedownward sloping demand curves for their products asopposed to the perfectly elastic demand curve postulated in theneoclassical theory 45

WHY MARKETS DO NOT WORK IN THE WAYHYPOTHESIZED

• For LDCs the downward sloping demand curve has twoimplications:

• Lowering exchange rates may not have large immediate effects onsales

• There appears to be important externality effects across producerswith regard to quality

• Imperfect competition impedes entry into markets for two reasons• First because consumers may be concerned about the quality of

the good produced and new entrants may have the difficulties inestablishing themselves in new markets

• Firms in LDCs may face great uncertainties about their ability toproduce and market new goods

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MARKET FAILURE AND GOVERNMENT INTERVENTION

• Market failures particularly those related to imperfect andcostly information may provide insights into why the LDCshave a lower level of income

• What is at stake here is more than just differences in factorendowments but basic aspects of the organization of theeconomy including the functions of the markets

• Markets are an important set of institutions in the organizationof modern economies

• Market failures are particularly pervasive in LDCs

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MARKET FAILURE AND GOVERNMENT INTERVENTION

• Good policy requires identifying them , asking which ones canbe directly attacked by making markets work more effectivelyand which cannot

• There is need to identify which market failures can beameliorated through non market institutions (with governmentperhaps taking instrumental role in establishing these nonmarket institutions)

• We need to understand both the limits and strengths of marketsas well as the strengths and limits of government interventionsaimed at correcting market failures

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THE POLITICAL FRAMEWORK OF AGRICULTURALPOLICY DECISIONS

• Why do governments act as they do?• Agricultural policy can be defined as the set of decisions taken

by government that influence the prices farmers confront in themarkets which determine their incomes

• The level of farm revenues is determined in part by the pricesat which sales are made in markets for agriculturalcommodities

• The prices which farmers must pay for farm inputs help todetermine their costs thus in combination with revenues, thenet money value of their incomes from farming

• The real value of farm incomes in turn is determined by theprices which farmers must pay for consumer items

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THREE APPROACHES TO POLICY ANALYSIS

• Research throughout the developing world suggests thatgovernment policy tends to be antithetical ( not supportive oreventually work against) to the interests of farmers

• Governments tend to lower prices that farmers receive forproduce

• Governments tend to shelter domestic manufacturers fromcompetition thereby raising the prices farmers must pay forconsumer items

• While governments subsidize farm inputs, these tend to becaptured by large farmers and not the majority of the poorfarmers

• Incomes of those farmers are thus adversely affected byagricultural policies of third world governments

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THREE APPROACHES TO POLICY ANALYSIS

• Government policies tend to weaken production incentives forfarmers

• When governments do offer positive incentives for increasedproduction they tend to do so by lowering costs rather than byincreasing gross revenues

• That is by subsidizing the prices of farm inputs rather thanraising prices of farm commodities

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APPROACH ONE : MAXIMIZING SOCIAL WELFARE

• The first approach is the most often adopted by economists• It treats governments as agencies of maximizing social welfare• Public policy is viewed as a set of choices made by

governments to secure society’s best interests which is bestserved by development

• This approach suffers from problems as follows;• Lack of explanatory power, Noting the underlying objective of

a policy program often does not account for the particularchoice of instrument

• For example , to secure increased food productiongovernments could either pay higher prices to farmers orexpending the same amount of resources (as on food) onprojects 52

MAXIMIZING SOCIAL WELFARE

• Under normal circumstances, the former would be the moreefficient way of securing this social objective but the later ismore often chosen

• Governments who want low priced food may often strive toimprove low food prices

• This choice of policy instrument may weaken economicincentives

• This may lead to lower production and higher food prices

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SECOND APPROACH: POLICY AS A BARGAINING OUTCOME FOR PRIVATEPRESSURE GROUPS

. According to this approach, governments do not pursue transcendental(beyond the realm or reach of the senses) social interests; rather they respondto private demands

• Public policy is regarded as an outcome of political competition amongorganized groups

• Urban consumers are geographically concentrated and strategically locatedand are easy to organize and therefore are an influential force in politicshence the consumer power as opposed to the producer power reigns supreme

• However the question remains. How do govts. get away withinstitutionalizing the interests of political minorities in countries where over50% of GDP and over 70% of the labor force are in agriculture

• How can govts. remain in power while maintaining agricultural programswhich violates interests of most farmers?

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USING PUBLIC POLICY TO RETAIN POLITICAL POWER

• The third approach views govts. as agencies that seek to stayin power

• It underscores the features of agricultural programs that letgovts organize political followings and disorganize politicalopposition particularly in the rural areas

• Also known as hegemonic approach to policy analysis• It stresses two general points:• That economic efficiency can be politically useful and that• Govts controlled markets can be employed as instruments for

political power e.g. food distribution and development work

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USING PUBLIC POLICY TO RETAIN POLITICAL POWER

• Economically suboptimal programs can be politicallyattractive

• This approach explains some puzzling aspects of agriculturalpolicy (subsidies for example)

• For example in seeking increased food production govts. Oftenfavor project based policies over price based policies

• This is because price based policies can be politically costly• They are also usually resisted by urban interests• Project based programs often provide superior resources to

those who seek to organize rural areas (rural roads constr.)

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TOPIC 2: AGRICULTURAL TRANSFORMATION ANDRURAL DEVELOPMENT TODARO CHAPTER 9 p281

• Quote 1: “ It is in the agricultural sector that the battle forlong term economic development will be won or lost”Gunnar (Myrdal, Nobel Laureate Economics)

• Quote 2: “ The main burden of development andemployment creation will have to be borne by the part of theeconomy in which agriculture is the predominant activity,that is the rural sector ’’ (Francis Blanchard, DirectorGeneral of International Labor Organization)

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AGRICULTURAL TRANSFORMATION AND RURALDEVELOPMENT CONTINUED

• If migration to the cities in Asia ,Africa , Latin America andAmerica is proceeding at technically unprecedented rates, alarge part of the explanation can be found in the economicstagnation of the outlying rural areas

• Over 2 .2 billion people in the 3rd world grind a meager livingfrom agriculture

• Over 3 billion lived in rural areas in 1993 out of about 6 billionpeople in the world

• Almost 70% of the world’s poorest people are located in therural areas and are engaged primarily in subsistenceagriculture

• Their basic concern is survival 58

AGRICULTURAL TRANSFORMATION AND RURALDEVELOPEMNT CONTINUED

• If development is to take place and become self sustaining ,then it must start in the rural areas in general and theagriculture sector in particular

• The core problems of widespread poverty, growing inequality,rapid population growth and rising unemployment all findtheir origins in the stagnation and often retrogression ofeconomic life in rural areas

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TOPIC 3: THE TRADITIONAL ROLE OF AGRICULTURE INECONOMIC DEVELOPMENT

• This has been viewed as passive and supportive• Economic development was seen as requiring a rapid structural

transformation of the economy from one predominantly focusedon agricultural activities to a more complex modern industrial andservice society

• Agriculture’s primary role was to provide sufficient low pricedfood and manpower to the expanding industrial economy whichwas thought to be the dynamic leading sector

• In an overall strategy of economic development Lewis’s famoustwo sector model is an outstanding example of a theory ofdevelopment that places heavy emphasis on rapid industrialgrowth with agriculture fuelling the industrial expansion by meansof its cheap food and surplus labor 60

THE TRADITIONAL ROLE OF AGRICULTURE INECONOMIC DEVELOPMENT

• Today development economists are less sanguine about thedesirability of placing such heavy emphasis on rapidindustrialization

• They now advocate the view that the agriculture sector inparticular and the rural economy in general must be thedynamic and leading elements in any overall strategy, at leastfor the vast majority of the contemporary third world countries

• An agricultural and employment based strategy of economicdevelopment requires at a minimum three basiccomplementary elements

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TRADITIONAL ROLE OF AGRICULTURE IN ECONOMICDEVELOPMENT

• Accelerated output growth through technological institutionaland price incentive changes designed to raise the productivityof small farmers

• Rising domestic demand for agricultural output derived froman employment oriented urban development strategy

• Diversified non agricultural labor intensive rural developmentthat is directly or indirectly supported by the farmingcommunity

• To a large extent the 1970’s and 1980’s witnessed a remarkabletransition in development thinking in which agricultural andrural development came to be seen by many as the sine quanon of national development

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• Without such integrated rural development industrial growtheither would be stultified or if it succeeded would create suchsevere internal balances in the economy that the problems ofwidespread poverty inequality and unemployment wouldbecome even more pronounced

• To this effect 5 questions need to be asked about third worldagriculture and rural development as these relate to overallnational development

• Question 1: How can total agricultural output and productivityper capita be substantially increased in a manner that willdirectly benefit the small farmer and landless rural dweller,while providing sufficient food surplus to support a growingurban radical sector?

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• Question 2 : What is the process by which traditional lowproductivity peasant farms are transformed into highproductivity commercial enterprises?

• Question 3 : When traditional family farmers and peasantcultivators resist change, is their behavior stubborn andirrational or are they acting rationally within the context oftheir particular environment?

• Question 4 : Are economic and price incentives sufficient toelicit output increases among peasant agriculturalist or areinstitutional and structural changes in rural farming systemsalso required?

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• Question 5 : Is raising agricultural productivity sufficient toimprove rural life or must their be concomitant off farmemployment creation along with improvements in educationalmedical and other social services?

• In other words what do we mean by rural development andhow can it be achieved?

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A FRAMEWORK OF ANALYSIS

• Following the classic analysis of Kuznets (1961) the agricsector in LDCs may be seen as being potentially capable of fourtypes of contribution to overall economic growth anddevelopment

• First, expansion of the non agric. sectors is strongly reliant ondomestic agriculture not only for a sustained increase in thesupply of food but also for raw materials used in manufacturingproducts such as textiles

• Kuznets termed this the production contribution• Secondly, because of the strong agrarian bias of the economy

during the early stages of economic growth, the agric.population inevitably forms a substantial proportion of thehome market for the producer goods as well as consumer goods.This is termed the market contribution by Kuznets 66

FRAMEWORK OF ANALYSIS

• Thirdly, because the relative importance of agriculture in theeconomy inevitably declines with economic growth anddevelopment, agric is seen as the principal source of capital forinvestment elsewhere in the economy

• Thus the development process involves the transfer of surpluscapital from agric to the non agric sector

• Similarly, development also entails the transfer of surpluslabor from agric to the non agric sector especially over thelong term

• Kuznets termed this as agriculture’s factor contribution

67

A FRAMEWORK OF ANALYSIS

• Fourthly, domestic agric is capable of contributing beneficiallyto the balance of overseas payments either by augmenting thecountry’s export earnings or by expanding the production ofagric import substitutes

• This foreign exchange earnings is not explicitly identified byKuznets but is implied in his market contribution

• We begin exploring the framework of analysis by goingthrough each one of these four approaches in detail

• We begin by analyzing the product contribution and thenproceed with the other three approaches in the next slides

68

FOOD CONTRIBUTION

• In LDCs, domestic agric sector is the principal source of foodfor consumption by non agric workers

• Diversification of the economy is therefore contingent uponfood producers producing a surplus in excess of their ownsubsistence requirements

• Imports can make up for the shortfall save for foreignexchange problems scarcity

• Unlike capital goods food imports are consumed and do notaugment the capital stock

• Opportunity costs of food imports are therefore higher thancapital goods in terms of lower investment and consequentlyreduced rate of economic growth

69

FOOD CONTRIBUTION

• How does industrialization and urbanization affect the demandfor food?

• As industrialization and urbanization proceed, the rate ofincrease in the off farm demand for food tends to exceed therate of growth in industrial employment for two reasons:

• The first is because the real earnings of industrial workers areusually higher than those of agricultural workers

• Secondly because in LDCs the income elasticity of demand forfood is relatively high

• So the migration of workers from higher paid industrialemployment may cause a relative scarcity of food unless theproductivity of those remaining in agric. rises fast enough toprovide the migrants of higher per capita food consumptionthan previously 70

FOOD CONTRIBUTION

• Failure to expand food surplus quickly results into higherprices if free market operates or rationing if govt. intervenes toprevent prices from rising

• Due to the primacy of food as a wage good as reflected by thehigh ratio of food expenditure to total H/h expenditure inLDCs rapid food price inflation frequently leads to serioussocio political instability which is inimical to economic growth

• Again because rising food prices increase the pressure foremployment to concede higher wages which are correlated toproductivity, industry terms of trade deteriorate

• Hence due to falling profits and lower investment there isdrastic decline in industrial development

71

PRODUCT CONTRIBUTION

• In a developing economy where per capita incomes are rising,growth in the agric sector can be expected to lag behind nonagric sector growth for three reasons:

• The demand for food and other agric products is generally lessincome elastic than the demand for non agric products due tothe Engel effect (changes in dd as a result of rising incomes)

• Due to scientific advances and associated technologicalinnovation in agriculture, farmers become increasingly relianton inputs purchased from the non farm sector of the economy

• This is termed the changing resource structure of agriculturaleffect


• Because the demand for off farm marketing servicesdistribution, storage and processing is more elastic than thedemand for agric products at farm gate ,the farmer’s share offood expenditure at retail prices declines with time.

• This is what is called urbanization effect• Taking into cognizance of the above three points, developing

countries should• Take note that the they should not fall into the trap of rapid

industrialization without parallel development in agriculture


• There are two basic reasons why LDCs development based on structuraldiversification of the economy is constrained by the rate of growth in themarketed output of domestic agriculture

• The first reason is that the domestic farm sector is an important source ofraw materials for use in industries such as textiles and food processing, aswell as being the principal source of food for consumption by growingnumbers of non food products employed in industry

• As agric becomes more and more closely integrated with other sectors ofthe economy due to the changing resource structure and urbanizationeffects ,the multiplier effects of increased agric production and incomesassume an ever increasing importance in relation to the growth in demandof labor and other industrial inputs

PRODUCTION LINKAGES BETWEEN AGRICULTURE ANDOTHER INDUSTRIES

• There is a natural long term tendency for agric. Sector’s shareof GDP to decline as real GDP per capita rises

• But because of the income elasticity of demand for the valueadded to agricultural raw materials by agro industries isusually higher than for the raw materials themselves , theagribusiness sector declines at a much slower rate

• The inter-industry linkage (which describes the inter-sect oralinterdependence) measures the effect of an autonomousincrease in final demand for the product of a given industry notonly on the output of that industry and the outputs of industriessupplying the first industry with inputs but also the outputs ofyet other industries supplying the suppliers in a second roundof transaction

75

BACKWARD FORWARD AND TOTAL EFFECTS

• The second round leads to a third and so forth and so on• The first round of effects are sometimes termed the direct

effects• The second round etc are called the indirect effects• Backward linkages measure the ratio of intermediate input

purchases from other industries to a particular industry’s totalvalue of production

• Forward linkages measures the ratio of intermediate outputsales to other industries to a particular industry’s total salesincluding sales to the final consumer)

• Total linkage is the sum of backward and forwardlinkages(Yeotopoulos and Nugent 1976, ch 16)

76

BACKWARD AND FORWARD LINKAGES CONTINUED

• It has been established that as a primary industry, agric lacksbackward linkages

• Secondly, because much agric production goes directly forhome consumption or for export without intermediateprocessing especially in LDCs ,backward linkages tend to berare

• This means that forward linkages are likely to be weak• In practice, LDC agric is rarely so primitive as to be without

backward linkages with input supplies

77

MARKET CONTRIBUTION

• Imagine a closed single sector agrarian economy on thethreshold of sectoral diversification

• Though the per capita incomes of those employed in theindustries may be expected to be somewhat above those offarmers, the farm sector because of its sheer size must initiallybe the major market for domestic industrial products

• Farmers’ expenditures on industrial goods both consumergoods and producer goods represent one aspect of agricmarket contribution to general economic development

• The agric sector’ s market contribution also includes the saleof agric food and other products to the non agric sector

78

MARKET CONTRIBUTION

• Kuznets describes the first as the marketization of theproduction process

• And the second as the marketization of the agricultural netproduct

• Both are accelerated by the adoption of new agric technology• Adoption results in higher agricultural output and large

marketed surplus of farm products

79

FACTOR CONTRIBUTION

• Whereas agric product contribution is derived from agricproduction per se and the market contribution is derived fromtrade with other sectors, the factor contribution is derived fromresource transfers to other sectors

• The resources transferred are capital and labor includinghuman capital.

• Here let us discuss why the net transfer of capital is a crediblemeans of development.

• The main arguments against intersect oral capital transfers arebased on considerations of equity

• Is it not fair that farmers should be deprived of part of theirwealth in order to fund developments in other sectors fromwhich they derive no direct benefits?

80

FACTOR CONTRIBUTION

• Arguments for transferring capital are fourfold:• The incremental demand for capital in the non agric sector may

be higher in a developing economy because the demand for thenon agric products and services is generally more incomeelastic than the demand for food and other agric products

• In effect the transfer reflects the declining relative importanceof agriculture in the economy

• Secondly, the incremental capital output ratios in LDC agricmay infact tend to be lower than in LDC industries hencescope exists for raising productivity in agric using means thatrequire only a moderate outlay of capital

• For instance adopting high yielding crop varieties andimproved strains of livestock and intensifying use of fertilizersand pesticides 81

FACTOR CONTRIBUTION

• For instance adopting high yielding crop varieties and improvedstrains of livestock and intensifying use of fertilizers andpesticides

• Thirdly, as the dominant sector in the economy of LDC’s, agricis virtually the sole domestic source of savings and investmentduring the initial stages of development

• Foreign private investment and overseas aid are onlysupplementary sources of investment capital

• Fourthly, farmers are likely to benefit indirectly from non agrictype investments such as improvement of communications andprovisions of public utilities

82

FACTOR CONTRIBUTION

• Having argued a case for some transfer of capital from agric toother sectors we proceed to discuss the alternative means oftransfer

• Governments can either rely on voluntary decisions of privateinvestors in a free market situation or governments can resortto compulsions (interventions)

• Griffin (1979,p109) summarizes the conditions governing freemarket transfer of capital from the agric sector to the nonagric sector.as follows:

• Farmers must sell part of their output outside of their ownsector i.e. a market surplus of agric products must exist

83

FACTOR CONTRIBUTION

• Farmers must be net savers i.e. they must consume less thanthey produce

• Farmers’ savings must exceed their investment agriculture• If these conditions are satisfied agric will have a balance of

payments surplus with the rest of the economy

84

URBANIZATION AND RURAL URBAN MIGRATION:THEORY

• We now turn our attention to one of the perplexing dilemmasof development

• The move enmasse of people from rural to urban areas• Current rates of urban population growth range from under 1%

per annum in two of the world’s largest cities, New York andLondon to over 7% per annum in many African cities e.g.Nairobi, Lagos and Accra

• In Asia and Latin America it is 5% per annum in urban growth• Given such high urban growth rates, how will these cities cope

economically, environmentally and politically with such acuteconcentrations of people

85


• While it is true that cities offer the cost reducing advantages ofeconomies of scale, the social costs of progressive overloadingon housing and social services can be overwhelming

• Former World Bank President Robert McNamara said thatthese sizes are such that any economies of location aredwarfed by costs of congestion

• Rapid urbanization has brought along with it the prolificgrowth of huge slums and shanty towns

• Today slum settlements represent over one third of the urbanpopulation in all developing countries

86


• For instance Metropolitan Cairo is attempting to cope with apopulation of 10 million people with a water and sanitationsystem built to serve two million people.

• The urban sector is comprised of the formal and informalsector

• The question that arises is that “Is the formal sector merely aholding ground awaiting entry into the formal sector and assuch is a transitional phase that must be made comfortablewithout perpetuating its existence or has it come to stay?”

• In order to answer this question let us examine the urbaninformal sector.

87

URBAN INFORMAL SECTOR

• The existence of an unorganized, unregulated and mostly legalbut unregistered informal sector was recognized in the early1970’s following observations in several developing countriesthat massive addition to urban labor force failed to show up informal modern sector unemployment statistics

• Studies have shown that the share of urban labor force engagedin informal sector activities ranges from 20% to 70%

• Failure of the rural sector and urban sector to absorb additionsto the labor force are lending credence to the role played by theinformal sector as a panacea for the growing unemploymentproblem

• The informal sector is characterized by a large number of smallscale production and service activities that are individually orfamily owned and use labor intensive and simple technology

88

URBAN INFORMAL SECTOR

• They tend to operate like monopolistically competitive firms ,with ease of entry , excess capacity and competition driving profits(incomes) down

• The are usually self employed ,workers have little formaleducation and are generally unskilled and lack access to capital

• As a result the worker productivity and income tend to be lower inthe informal sector than in the formal sector

• They do not enjoy the measure of protection afforded by theformal sector

• Most entrants are recent migrants from rural areas unable to findemployment in the formal sector

• They use labor saving and simple technology89

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

SECTOR• The informal sector is linked with the rural sector in that it

allows excess labor to escape from rural poverty andunderemployment though for not much better life

• It is closely connected with the formal sector in the sense thatformal sector depends on the informal sector for cheap inputsand wage goods for its workers

• The informal sector in turn depends on the growth of theformal sector for a good portion of its income and clientele

• The informal sector also subsidizes the formal sector byproviding raw materials and basic commodities for its workersat artificially low prices maintained through the formal sector’seconomic power and legitimacy granted by Government

• The informal sector undoubtedly provides incomeopportunities to the many poor 90

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

• The formal sector in LDCs has a small base in terms of outputand employment

• For it to absorb employment it must grow at a high rate of atleast 10% per annum according to ( ILO report )

• This means that output must grow at an even faster rate, sinceemployment in this sector increases less than proportionatelyin relation to output

• With the current trends in LDCs , this seems unlikely• Thus the burden on the formal sector to absorb more will

continue to grow unless other solutions to the urbanemployment problem are provided

• Moreover the informal sector has demonstrated its ability togenerate employment and income for the urban labor force(about 50%) 91

FURTHER ARGUMENTS IN FAVOUR OF INFORMALSECTOR

• Scattered evidence indicates that the informal sector generatessurplus even under the currently hostile policy environmentdespite a lot of constraints and hardships

• The informal sector surplus could provide an impetus togrowth in the urban economy

• As a result of its low capital intensity only a fraction of thecapital needed in the formal sector is required to employ aworker in the informal sector.

• This offers considerable savings to developing countries whichare often plagued by shortages of capital

92

FURTHER ARGUMENTS IN FAVOUR OF INFORMALSECTOR

• By providing access to training and apprenticeships atsubstantially lower costs than that provided by formalinstitutions and the formal sector the informal sector can playan important role in the formation of human capital

• The informal sector generates demand for semi skilled andunskilled labor whose supply is increasing in both relative andabsolute terms and is unlikely to be absorbed by the formalsector with its increasing demands for skilled labor force

• Informal sector also plays a role in recycling waste materialsvia collection of scrap materials

• Finally the promotion of the informal sector plays an importantrole in the increased distribution of benefits of development tothe poor. The majority of whom are concentrated in theinformal sector( Van Der Walt)

DISADVANTAGES OF THE PROMOTION OF THEINFORMAL SECTOR

• One of the disadvantages lies in the strong relationshipbetween the rural urban migration and labor absorption in theinformal sector

• Migrants from the rural sector have both a lower employmentrate and a longer period before obtaining a job in the formalsector.

• Promoting income and employment opportunities in theinformal sector could therefore aggravate the urbanunemployment problems by attracting more labor than eitherthe informal or formal sector could absorb

• There are concerns about the environmental consequences ofa highly concentrated informal sector in the urban areas

( pollution, congestion etc)

WHAT TO DO

• There is very little empirical evidence as to what measures must beundertaken to promote the informal sector

• ILO has made some general suggestions:• Governments have to soften their hostile attitude towards the informal

sector and maintain a positive attitude• Governments should facilitate training in the areas that are most beneficial

to the urban economy• They should provide capital and technology to the informal sector. This

would permit their enterprises to expand and produce more profit andhence generate more income and employment

• Provision of infrastructure and suitable location for work( Flea Markets)• Promotion of informal sector outside the urban areas (often resisted by

informal sector)

WOMEN IN THE INFORMAL SECTOR

• Women often represent the bulk of the informal sector laborsupply working for low wages in unstable jobs unlike men

• The increase in the number of single female migrants has alsocontributed to the rising urban households headed by women

• These tend to be poorer, experience tighter resourceconstraints and retain high fertility rates

• The changing composition of migration flows has importantand demographic implications for many urban areas in LDCs

• They are more likely to be poor and with high dependencyratios and less likely to obtain formal education and health,clean water and sanitation

WOMEN IN INFORMAL SECTOR

• Many women run micro enterprises which require little or no start upcapital

• Though women’s restricted access to capital leads to high rates of return ontheir tiny investments, the extremely low capital labor returns confinewomen to low productivity undertakings

• Studies in Latin America and Asia have found that women are able to makemore productive use of capital and that the rates of return on investmentsoften exceed those of men

• Despite this, they remain few in number and face problems in accessingcredit which is usually channeled through the informal sector

• Governments must create by design pro active policies towards women ifthey are to develop and succeed in informal sector

URBAN UNEMPLOYMENT MIGRATION ANDDEVELOPMENT

• The major consequence of urbanization is an increase in unemployment inboth the formal and informal sector in the urban areas

• Until recently rural urban migration was viewed favorably in the economicdevelopment literature

• Internal migration was thought to be a natural process in which surpluslabor shifted to the urban sector from rural areas because its socialmarginal productivity of labor was assumed to be zero

• This was the Lewis thinking which no longer holds in this age• This is because it is now abundantly clear from recent LDC experiences

that rates of rural urban migration continue to exceed rates of urban jobcreation and surpass greatly the absorption capacity of both industry andurban social services

URBAN UNEMPLOYMENT MIGRATION ANDDEVELOPMENT

• Migration exacerbates the rural urban structural imbalances intwo ways:

• On the supply side, internal migration disproportionatelyincreases the growth rate of urban job seekers

• On the demand side urban job creation is generally moredifficult and costly to accomplish than rural job creationbecause of the need for substantial complementary resourceinputs for most jobs in the industrial sector

• We must recognize therefore at the outset that migration inexcess of job opportunities is both a symptom of and acontributor to LDC underdevelopment

CONSEQUENCIES OF MIGRATION FOR RURAL ANDURBAN ECONOMIC AND SOCIAL DEVELOPMENT?

• Factors affecting migration decisions are varied and complex.There are non economic (social , cultural psychological) andeconomic factors

• NON ECONOMIC• These include the desire of migrants to break away from

traditional constraints of social organizations (e.g.. Arrangedmarriages)

• Physical factors include climate, floods droughts• Demographic factors , reduction in mortality rates and the

concomitant high rates of rural population growth• The allure of bright lights• Good infrastructure, communication and modernity

MIGRANT CHARACTERISTICS

• ECONOMIC REASONS: Standard push from subsistenceagriculture and the attractive pull of relatively perceived highurban wages but also the potential push back towards ruralareas as a result of high urban employment

• DEMOGRAPHIC REASONS : Young women 15-24 movingacross borders

• EDUCATIONAL REASONS: People with higher educationare more likely to migrate

• Migrants both male and female seem to come from all socioeconomic strata with the majority being very poor ( Todaro)

SUMMARY AND CONCLUSIONS OF A COMPREHENSIVEMIGRATION AND EMPLOYMENT STRATEGY

• Most Economists agree that:• We need to create an appropriate rural urban economic balance

i.e. we need an integrated development of the rural sector• Expansion of small scale labor intensive industries• Eliminate factor price distortions e. g. capital subsidies• Choose appropriate labor intensive technologies (low cost)• Reduce population growth. The question is how??

THE ECONOMIC NATURE OF TRADITIONAL AGRICULTURE :RESOURCE USE EFFICIENCY AND TECHNICAL CHANGE IN

PEASANT AGRICULTURE :CH 6 GHATAK

• Here we discuss the scope for increasing agric output andincomes in LDCs from three aspects

• We consider how efficient farmers are in utilizing theirexisting resources and the feasibility of agric progress anddevelopment without technical change

• We shall also consider how agric technical change is generated• How it affects agric output and incomes including

distributional effects (welfare effects)• Finally we shall consider policy implications particularly for

agric research and for farm mechanization

EFFICIENCY OF RESOURCE ALLOCATION

• We shall attempt to clarify the various concepts of efficiency• We shall also examine how efficiency relates to farm size in

LDCs• CONCEPTS OF EFFICIENCY: We begin by distinguishing

the difference between technical efficiency and allocative(price efficiency) then

• How economic efficiency combines the two• Consider a simple production function in which land and

labor are combined to produce a single homogeneous product• Q= f (L,K) Refer to Fig 1 on Board (Allocative Technical and

Economic Efficiency)

ALLOCATIVE,TECHNICAL AND ECONOMIC EFFICIENCY

• SS’ is an outer bound production function given current stateof knowledge

• It is not technically feasible to produce the level of outputrepresented by SS’ on an alternate isoquant which is closer tothe origin O.

• Any farm lying on SS’ is technically efficient e.g. Q* or Q1• But any farm in the space above SS’ e.g. Q2 or Q3 is not

technically efficient• Allocative efficiency demands that factors be combined in the

same ratio as their relative prices.• The land labor ratio is given by the slope of the isocost curve

AA’

ALLOCATIVE EFFICIENCY CONTINUED

• Thus Q* is allocatively efficient whereas Q1 is not• Q1 is technically efficient but allocatively inefficient• Q2 and Q3 are both technically inefficient and may be

allocatively inefficient as well• Only Q* is both technically and allocativelly efficient• If we define economic efficiency as the combination of

technical and allocative efficiency only Q* is economicallyefficient

EFFICIENCY AND FARM SIZE

• The theory of returns to scale is concerned with therelationship between firm’s level of output and its long runaverage costs when all factors are varied in the sameproportion

• In agric scale theory has got limited relevance because offactor rigidities and indivisibilities even in the long run

• In seeking to gain profit or utility by changing the level ofoutput farmers typically vary the proportions in which factorsare combined e.g. the fertilizer rate alters the fertilizer landratio

• An important source of cost saving in agric is the fullerutilization of spare capacity or excess capacity embodied inindivisible factors such as machinery and buildings


• The term economy of size embraces not only economies ofscale in the strict sense of constant factor proportions but alsoeconomies derived from using indivisible factors moreefficiently

• Indivisibility applies more to capital inputs• However principal inputs of traditional agric are land and labor• These are relatively easy to divide• If the price of land declines with increasing farm size whereas

the price of labor increases, the land labor ratio will tend tovary directly with the farm size i.e. ceteris paribus

• Labor will be used most intensively on the smallest farms


• Under a labor intensive system of agric where output per unit ofland is closely and directly related to labor input ,the productivityof land as reflected by crop yields will tend to be inversely relatedto farm size

• If land is scarcer than labor which is often the case in LDCs, thisargument carries the important policy implication that smallerfarmers may utilize resources more efficiently than larger farms

• Moreover there may be a direct link between a country’s farm sizestructure ad its level of aggregate agric prod

• In LDC context a large farm structure may not be consistent withefficient resource utilization or with achieving the optimum levelof aggregate production


• Due to measurement problems empirical evidence of differencesin prices of land and labor between large and small farms in LDCsis virtually impossible to obtain.

• However there are apriori reasons for expecting labor to berelatively cheap and land to be relatively dear to operators of smallfarms

• Dear labor and cheap land applies to large farm operators• Results of two major empirical studies support the hypothesis that

in traditional agric output per unit of land area does tend to beinversely correlated with farm size

( Youtopoulis and Nugent 1976, ch6)• It was deduced that the observed difference in economic efficiency

in favour of the small farms was due to their superior technicalefficiency since all the farms covered by the study appeared to beprice efficient

TECHNOLOGICAL CHANGE IN AGRICULTURE

• We shall focus on the following aspects:• The character of agric technical change with specific reference

to technology e.g. (high yielding varieties)• We consider the generation of technological change in agric

including the theory of induced technical and institutionalchange

• We shall also review the origins, spread and economicconsequences of HYV technology in LDCs including bothdirect and indirect effects altogether

• We shall also consider the distributional consequences offactor biases embodied in new agric technology

• Finally we shall consider policy implications of the selectionof new agric technologies that are appropriate to the economiccircumstances of LDCs emphasizing the role of governments

THE NATURE OF TECHNOLOGICAL PROGRESS

• A technological improvement possesses two general properties• First, a new production function is created such that any given

quantities of resources yields a larger product• Secondly the proportion in which resources are combined to

produce a given output at least cost are generally changed• Technological progress is commonly conceptualized as a shift

variable• It shifts the production function positively or vertically• Refer to fig 2. (on board page 8 in notes)

THE NATURE OF TECHNOLOGICAL PROGRESS

• Suppose that X is the fertilizer application rate and Y is the yield of wheat.P1 might represent a traditional wheat variety and P2 a new wheat variety,a higher yielding variety

• NOTE: In this case technological improvement is not embodied in thevariable input (fertilizer) but in one of the fixed inputs, the seed

• The new higher yielding variety is more responsive to fertilizer than themore traditional variety in two senses

• (1) The yield per unit of fertilizer is higher above the threshold applicationrate

• (2) The economic response to fertilizer extends to a higher rate ofapplication. Profit is maximized

NATURE OF TECHNOLOGICAL PROGRESS INAGRICULTURE

• There is no reason why the technological improvement shouldnot be embodied in the variable input (rather than in one of thefixed inputs)

• The improvement might be embodied in the fertilizer and notthe seed

• Any innovation increasing the available crop nutrients per unitweight of fertilizer would have this effect

• Empirically it may be difficult to identify precisely sources oftechnological improvement

• Production functions are estimated and are observed to shiftdynamically but the reasons for the shifts are unknown

THE NATURE OF TECHNOLOGICAL PROGRESS INAGRICULTURE

• Technological improvement effectively become disembodied• The bottom line is that technological progress is beneficial

both to individuals and society as a whole• There tends to be losers ad gainers from technological

progress• Possible losers include landless farmer, farmers who re

unwilling to adopt better methods• Gainers would include farmers who adopt and have land• It is also recognized that the benefits of technological progress

are more certain for landowners than for tenant farmersbecause tenants risk dispossession by their landlord

THE NATURE OF TECHNOLOGICAL PROGRESS INAGRICULTURE

• The increased profits afforded by technological advances givelandlords an added inducement to repossess tenanted land inorder to farm it themselves

• Thus a principal argument for the land reform is to achieve amore equitable distribution of the benefits of technologicalprogress in agriculture

GENERATION OF NEW AGRICULTURAL TECHNOLOGY

• Technological innovation is a two stage process of;• Invention or discovery and• Adoption of the improved input or method of production by producers• Innovation without adoption can have no economic impact unless and until

it is adopted• Adoption is preceded with invention• Traditionally there has been no theory of invention or technological

improvement• But in as far as agriculture is concerned there is a new approach to the

generation of new technological discoveries• This is the theory of induced technical and institutional change

(by Hayami and Ruttan 1971)

THE THEORY OF INDUCED TECHNICAL ANDINSTUTUTIONAL CHANGE

• The crux of the theory is that research and investment whichprecedes new discoveries leading to technical progress isinduced by market forces

• In agric changes in relative scarcities of resources (as expressedby price changes ) especially land and labor induce a deriveddemand for technological innovation to facilitate thesubstitution of relatively less scarce and cheap factors for morescarce and expensive ones

• For example in a labor scarce economy there is a tendency forcapital in the form of labor saving machinery to be substitutedfor human labor

• But in a land scarce economy , yield increasing and land savinginputs such as fertilizers, irrigation and HYV are substituted forland

INDUCED TECHNICAL CHANGE

• Hayami and Ruttan have evolved a production functionhypothesis to explain how induced technical change increasesthe elasticity of response to factor price changes

• Consider first varying the amount of a single input factor suchas fertilizer in response to change in the factor (product priceratio

• Although farmers can normally be expected to increasefertilizer inputs in response to a decline in fertilizer crop priceratio, the amount of the fertilizer increment and crop yieldincrement corresponding with it may both be onlycomparatively small

• Unless new crop verities are developed which are moreresponsive than traditional varieties to fertilizer application

INDUCED INSTITUTIONAL CHANGE

• In LDC s according to Hayami and Ruttan “s theory ,inducedtechnical change tends to be impeded by institutional barriers

• Lack of agricultural research institutions to foster thediscovery and application of new scientific and technicalknowledge is a major setback

• Institututional innovation is consequently a sine qua non tobreak the bottleneck

• In other words technical innovation and institutionalinnovation are complementary

• Governments should take a leading role here

INDUCED INSTITUTIONAL CHANGE

• Institutional property rights should be guaranteed• It should be labor intensive biological innovations such as

HYVs• Research in private sector is likely to be biased towards capital

intensive and labor saving mechanical innovations hence theneed for governments to come in and cater for peasants whoare capital scarce

WEAKNESSES OF THE INDUCED TECHNICAL ANDINSTITUTIONAL CHANGE THEORY

• Underlying behavioral assumptions are neo classical .• These do not fit into the conditions of peasant agriculture in LDCs• Barriers to technical change in the short run may be insurmountable in

LDCs due to cultural and social reasons as well as uncertainty and riskversion and lack of knowledge

• Some of the reasons for technological stagnation include• Lack of appropriate alternative technology• Farmers” ignorance of better methods• Farmers’ lack of innovation• The risks and costs of adoption• Barriers to adoption due to market failures

POVERTY DYNAMICS FOOD AND THEENVIRONMENTAL NEXUS

• The relationship between population and food has been thesubject of major economic debate for at least 200 years

• Malthus published his famous essay on Principles ofPopulation in 1789

• Malthus was responding to Adam Smith ‘s more optimisticview of the economic implications of population growth asexpressed in the Wealth of Nations published in 1776

• The declining importance of the agriculture sector in manydeveloped countries due to modernization of the agriculturesector itself has diminished the relative importance of the landas a factor of production

POPULATION AND FOOD SUPPLIES

• Secondly most developed countries generally enjoy theadvantage of a relatively stable and low rate of populationgrowth

• The situation is very different in LDCs where agriculture andprimary industries are still dominant

• Population growth prevails and agriculture is still verytraditional

• Thus there is less reason to discard the pessimistic Malthusianview of the prospects for improving the economic lot of thebroad mass of a country’s population

THE CLASSICAL MODEL OF MALTHUS

• The key tenets in the Malthusian population theory include thefollowing:

• Increased population causes a parallel increase in the demand forfood

• The increased demand for food can be met either by bringingnew land into cultivation or by cultivating existing land moreintensively than before.

• Land is not only scarce but is also variable in fertility• The most fertile land is cultivated first in line with population

pressure• If additional labor is applied to existing land (at the intensive

margin) its marginal productivity will again decline due todiminishing returns

CLASSICAL MODEL CONTINUED

• Since diminishing returns to agricultural labor are inevitableand unavoidable, food production will always tend to growless rapidly than population

• In the long run population will always expand to the limit ofavailable food supplies at the subsistence level

• This means that continual population growth must inevitablyforce per capita food supplies back to subsistence level in thelong term

• More formally, the classical model implicitly assumes that theproduction function expressing the relationship betweenpopulation (as a proxy measure of agricultural labor input) andagricultural output is continuous through time

POLICY IMPLICATIONS OF THE CLASSICAL MODEL

• In predominantly agrarian societies curtailment of populationgrowth is the sole feasible means of materially improving theliving standards of the majority of the population

• The classical economists did not foresee the extent to whichEuropean countries would be able to expand the agriculturalproduction at both intensive and extensive margins ofcultivation( by means of land improvement, improvedcommunication and adoption of scientific methods of farming)

• At Malthus time major scientific advances were not in sight• Also the extent to which population pressure in the old world

would be relieved by the emigration was not foreseen

ECONOMIC LOCATION THEORY ARGUMENTS

• Economic location theory postulates that the rent of land isjointly determined by its fertility and its distance from themarket

• Land is valueless unless it is accessible• So contrary to the basic premises of the classical model , there

is no reason to expect declining marginal physical productivityof labor at the extensive margin due to declining soil fertility

• The principal constraint on expanding production at theextensive margin is likely to be rising marginal costs(especially transport costs ) rather than declining marginalreturns

ECONOMIC LOCATION THEORY ARGUMENTS

• Despite these technical criticisms, the Malthusian model maystill have policy relevance for some LDCs

• These countries lack the population pressure safety valves ofmassive oversees emigration( its now changing In Malawi notmany people go to the RSA mines)

• They are also unable to import large quantities of foodstuffsunless available on concessional terms

( due to lack of forex)• In LDC s birth rates have remained at or very close to

traditional high levels• In DCs they have actually declined e.g. in Austria

MALNUTRITION IN LDCs OVERT AND SILENT FOODPROBLEMS

• Malnutrition refers to a state in which diet is inadequate eitherin quantity or quality or both for normal health and physicalwell being

• In a market economy an individual’s food consumptionprimarily depends upon his income and tastes

• Assessment of nutritional adequacy of per capita food supplyfor a country is done through the food balance sheet

• The balance sheet compares the per capita food suppliesincluding imports and after making some allowance forwastage with objectively determined per capita nutrients

• The nutritional status of country is judged to be adequate onlyif per capita supplies are exceeded by per capita requirements

CONTINUED

• This approach assumes per capita requirements arehomogeneous

• But this is not true amongst different sexes and age groups• Under reporting can lead to underestimation of available

supplies because farmers will under estimate to avoid taxesand also due to statistical errors

• The food balance sheet ignores the whole problem of maldistribution of food supplies

• They assume equal distribution per capita which is notrealistic

OVERT AND SILENT FOOD PROBLEMS

• The conventional explanation of hunger focuses on the supplyof food and physical scarcity as signified by an average or percapita shortfall of surplus below consumption requirements

• ( termed the overt food problem by Reutlinger, 1977)• Thus assuming that members of the relevant population group

are either hungry or are adequately fed, this explanationoverlooks the possibility of when a proportion of the peopleare being adequately fed whilst the remainder are hungry dueto unequal distribution of the available food supply

• ( Reutlinger calls this the silent food problem)

CONTINUED

• The key to who goes hungry regardless of whether aggregate supplies arescarce or plentiful is the distribution of effective demand or what (Sen.,1981) calls Exchange entitlements

• Any economic change causing a reduction in per capita real income such asreduced working hours , unemployment or a sharp rise in price of food orother necessities will tend to squeeze the consumption of low incomehouseholds

• The scale of the cut in per capita consumption will be inversely related tofamily income

• Rich families my scarcely need to curtail their food consumption• Some poor families will be virtually priced out of the market• If aggregate food supplies are curtailed then families start experiencing

HUNGER

CONTINUED

• In its extreme form hunger becomes famine and people die ofstarvation

• According to (Sen. 1980) who uses the term food availabilitydecline to signify famine the causes of famine are as follows:

• People starve because per capita food supplies are suddenlyreduced to starvation levels by crop failure or other causes

• Sen. argues that food availability does not explain completelythe causes of hunger

• An alternative explanation of famine is that those that starvesuffer from lack of means to obtain sufficient food to remainalive

• Sen. calls this Entitlement Failure

CONTINUED

• Entitlement failures are of two kinds;• Direct entitlement failures in which the food producer fails to produce

enough and he or she is unable to feed himself or herself either by selfsupply or by trade

• Trade entitlement failures, These relate to those who can normallypurchase a sufficient quantity of food but are priced out of the market by asudden increase in demand

• In a slump famine direct entitlement failure predominates whereas tradeentitlement failures are the overriding factor in explaining a boom famine

• The entitlement failure explanation of famine suffers from being lessamenable to measurement than Food availability decline

• Note that FAD and entitlement failures are not mutually exclusive

AMELIORATION OF MALNUTRITION POLICY OPTIONS

• Lowering population growth rate• Augmenting food supplies (domestic and /or imported)• Re- distributing available supplies from the adequately or

overfed to the underfed• Some poverty reduction strategies include:• Food for work• Money for work• Food stamp programs• Targeted subsidies• Nutritional educational programs

THE ENVIRONMENT AND DEVELOPMENT

• QUOTE: “ Much of the environmental degradation witnessedtoday is primarily due to two groups of people” The top billionrichest and the bottom billion poorest( Nafis Sadic ExecutiveDirector , United Nations Population Fund 1991)

• The environment has become an important issue to economistsover the past few decades as far the success of the developmentefforts are concerned

• The interaction between poverty and environmentaldegradation can lead to self perpetuating process ofcommunities inadvertently destroying or exhausting theresources on which they depend for survival

• This can lead to severe consequences of self sufficiency,income distribution and future growth potential

THE ENVIRONMENT AND DEVELOPMENT

• Environmental degradation can also detract the pace of economicdevelopment by imposing high cots in developing countries through healthrelated expenses and reduced productivity of resources

• The poorest 20 % of the world’s population ( 6.7 billion , 2000) are theones that experience the consequences of environmental ills most acutelybecause they are the most vulnerable

• Environmentally sustainable growth is synonymous with the definition ofeconomic development because it enhances production of resources andliving conditions of the poor

• Though there is considerable disputes concerning environmental costsassociated with various economic activities ( Gautrain and The great damin China projects)

• Development economists believe and acknowledge that environmentalconsiderations should form an integral part of policy initiatives.

ENVIRONMENT AND DEVELOPMENT BASIC ISSUES

• Seven basic issues define the environment and development• Concept of sustainable development and linkages between the

environment i.e. Development plans should incorporateenvironmental accounting into policy

• Population and resources , slow pop. Growth will easepressure on environment

• For environmental policies to succeed 3rd world countries mustaddress issues of landlessness, poverty and lack of access toinstitutional resources

• Reduction in environmental destruction will lead to economicgrowth which will enhance incomes of the poor

ENVIRONMENT AND DEVELOPMENT BASIC ISSUES

• The increased accessibility of agricultural inputs to small farmers and theintroduction of sustainable methods of farming will help create attractivealternatives to current environmentally destructive patterns of resource use

• Land augmenting investments can greatly increase the yields fromcultivated land and ensure future food self sufficiency

• As total population grows and incomes rise , net global environmentaldegradation is likely to worsen. Some trade offs will be necessary toachieve sustainable world development

• Research reveals that the urban environment appears to worsen at a fasterrate than urban population size increases so that the marginalenvironmental cost of additional residents rises over time

• The most pressing environmental challenges in developing countries in thenext few decades will be caused by poverty. There will be health hazardscreated by lack of access to water, sanitation, air pollution, deforestationand severe soil degradation and loss of biodiversity

THE NEED FOR POLICY REFORM

• There is growing evidence that insufficient action has beentaken to reduce environmental hazards through primary healthcare education and the provision of services such as clean waterand sanitation

• There is need for better pricing policies and efficiencyrequirements in order to lead to improvements in the allocationof resources

• There is need to design environmental policy which takes intoconsideration the important role of women in the managementof resources

• This is because through their roles as managers of fuel andwater supplies , agricultural producers and guardians ofhousehold health, women control the fate of many of theworld’s resources

GLOBAL ENVIRONMENT, RAIN FOREST DESTRUCTIONAND GREENHOUSE GASES

• Although the early Malthusian prediction of environmentalcalamity proved to be overly pessimistic, recent scientificstudies indicate that there is cause for concern with respect tothe limited ability of the earth’s ecosystem to regenerate itself

• Increasing evidence regarding the extent of the ozonedepletion and encroaching global warming present alarmingimplications of global climate change

• Concerns include an increase in the incidence of skin cancer ,desertification and rising oceans

• It is through changes in patterns of land use that thedeveloping countries currently make the largest contributionto global concentrations of green house gases

CONTINUED

• It is estimated that deforestation alone accounts for roughly25% of all carbon dioxide emissions world wide

• Clearing the forests will reduce the environment’s absorptivecapacity of carbon dioxide

WHAT ARE THE POLICY OPTIONS IN LDCs and DCs?

• LDCs can embark on the following measures• Proper resource pricing• Community involvement• Clearer property rights and resource ownership Programs to

improve economic alternatives of the poor is a must e.g.programs to build roads, credit provision and creation of jobsin these areas.

• Raising the economic status of women through education,empowerment and health improvements

• Put up industrial emission policy in place to reduce pollution

CONTINUED

• DCs can embark on the following measures:• Encourage trade liberalization• Promote debt relief• Provide financial and appropriate technological assistance e.g.

debt for nature swap• Take a leadership role in research and development efforts

MAINTANING PRODUCTIVITY GAINS IN POST GREENREVOLUTION ERA

• World food security depends to a large extent on theproductivity of Asian farmers

• With approximately three billion inhabitants, Asia is home to55% of the world’s population and produces 40% of the globalcereal supply (mainly wheat and rice)

• Asia’s irrigated lowland cropping systems in which mostcereal production is concentrated were transformed in theearly 1960’s by the so called green revolution

• Green Revolution was based on input –response semi dwarfvarieties of rice and wheat referred to as modern varieties

MAINTAINING PRODUCTIVITY GAINS IN POST GREENREVOLUTION ERA

• When grown with increased levels of fertilizer and an assuredwater supply , modern varieties led to a sharp jump in yieldsand provided significantly higher incomes for millions offarmers who adopted the technology

• Today there are signs that the recent period of growth in Asianagriculture may be ending

• For example areas planted to cereals has declined in China andIndia

STAGES OF TECHNICAL CHANGE: A STYLIZED VIEW

• The process of agricultural intensification in Asia can bedepicted as occurring in several steps distinguished bythe development of and diffusion of technologies tosubstitute for emerging factor scarcities• According to this view technical change in Asia’s

land intensive cereal production systems proceedsthrough the following stages

PRE GREEN REVOLUTION PHASE

• Traditional varieties are cultivated using negligible amounts ofexternal inputs and productivity growth is modestThe main source of production increases is more extensive useof land and water resources e.g. expansion in area planted, ashift to more fertile land investment in irrigation infrastructure

GREEN REVOLUTION PHASE (INPUT INTENSIFICATIONPHASE)

• A technological breakthrough in form of input responsivemodern varieties provides the potential for a dramatic increasein land productivity, expressed in the form of higher crop yield

FIRST GREEN REVOLUTION PHASE

• Farmers increase their use of purchased inputs ( e.g. fertilizerand capital like tube wells, machinery) to substitute forincreasingly scarce land and labor

SECOND POST GREEN REVOLUTION PHASE (INPUTEFFICIENCY PHASE)

• Farmers use improved information and management skills tosubstitute for higher input use, leading to more efficientutilization of inputs while contributing to the sustainability ofthe resource base

• These stylized stages of technical change can be depicted inframework of conventional production functions

CONCLUSIONS

• The potential of the green revolution technologies is nowlargely exhausted hence there is a need to develop newtechnologies to ensure continued productivity growth in Asia’sintensively cultivated cropping systems.

• Distinct features of these new technologies will require:• Significant changes in the organization of agricultural research• Significant changes in the design of technology transfer

strategies• Significant changes in the implementation of policies to

encourage technical change• In particular it will be necessary to shift the bulk of public

expenditures from input subsidies to increased investment inpublic good aspects of technology development anddissemination

INSTITUTIONAL CONSTRAINTS ON AGRICULTURALDEVELOPMENT AND REMEDIAL POLICIES

• Here we discuss constraints imposed on agriculturaldevelopment by defects in the institutions controlling thedistribution of land, access to agricultural capital and creditand the competitive structure of agricultural markets

• We consider the motives for and possible effects of reformingpolicies in these areas

• We examine the system of landownership and land tenure• The meaning and motives for land reform• The possible benefits and costs of land reform• Its effect on farm output and marketed surplus• Limitations of land reform• And cooperative farming and tenancy reform as policy

alternatives to individual farm ownership

LAND OWNERSHIP AND TENURE SYSTEMS

• Systems of agricultural land ownership and tenure are bothdiverse and complex

• We can distinguish two systems into traditional and modernsystems

• Under traditional systems the ownership of land could be eithercommunal or private

• Under communal or tribal ownership farmers have individualrights of cultivation but not necessarily exclusive use of lande.g. grazing rights are often held in common

• Under private ownership, the rights of ownership andcultivation may either be exercised by the same person (ownerfarmer0 or separately by landlords or tenants

• In the traditional mode , the landlord-tenant system hasgenerally been feudal in character with tenants paying andlandlords receiving rent

MORDERN SYSTEMS OF LAND OWNERSHIP

• Under modern systems of land ownership the dichotomy iscapitalism versus socialism

• In the capitalist system land ownership is private with landowners exercising the option of either farming the landthemselves or letting it to a tenant usually paying a fixed cashrent

• In the socialist model, the land is owned by the state , althoughthe responsibility of cultivation is often given to cooperativegroups or collectives

• The collective farmers are required to meet production normsand delivery quotas set by the state

WHAT IS LAND REFORM?

• The use of the word land reform most commonly refers to theredistribution of landownership from traditional and feudaltype landlords to their previous tenants or wage laborers

• In principle the meaning of land reform can be extended tocover any socially beneficial change in a country’s system ofagricultural landownership or tenure arrangements

• For example, the change from a primitive system of communalland ownership to private ownership might yield a substantialsocial gains in terms of more intensive use of land and a largermarketed surplus

• In the short run land reform may be economically and sociallydisruptive

• Time is needed to establish a new structure of agriculturalproduction with supporting ancillary services such as credit,marketing and agricultural extension

• Thus in the short run there is bound to be some decline inagricultural production as an aftermath to land reform

EMPIRICAL EVIDENCE OF LAND REFORMS

• Empirical evidence of net benefits of land reformsmixed

• Records indicate a variety of results ranging fromsuccessful to unsuccessful reforms with other casesundecided

• The group of countries with successful reform s includeEgypt, Taiwan South Korea and Iran

• In all these countries an effective redistribution of landownership was combined with improved agriculturalproductivity and higher output

• Unsuccessful group includes Mexico where the ejidoshave lagged behind private farms in productivity andoutput growth

• Peru is another example where economic viability ofsmall farms have been difficult to establish despite theformation of cooperatives

• In Bolivia and Iraq output decline was dramatic andpersistent following land reforms

first reform was followed by a second reform whichworsened the problem of undersized farms

SUMMARY AND POLICY CONCLUSIONS

• The motives for land reform, as seen by its beneficiaries, deriveprimarily from the social and political aspirations of the ruralpopulation

• Farmers may have to be educated to see land reform as a meansof improving their productivity and incomes

• The agricultural benefits of land reform depend on much morethan the mere redistribution of land ownership

• A complete agrarian reform is needed entailing redistributionplus a complete package of supporting ancillary services

• Although the possible economic benefits of land reform includea larger agricultural output and higher farm income and a greatmarketed surplus of agricultural products , the realization ofthese benefits depends upon numerous factors

• These include the form and content of government policies• Due to its disruptive character, land reform is virtually bound to

result in some short term loss of agricultural output

SUMMARY AND POLICY CONCLUSIONS

• The empirical evidence of the agricultural benefits of land reform reveals amixture of successes and failures. A general failing of virtually all reformsis that very few of the benefits have reached the very small scale farmersand landless laborers

• In very densely populated countries the agricultural area released by landreform may be insufficient to provide adequate sized farms for all ruralfamilies e.g. in RSA only 6% of land has been redistributed since the landreform began over ten years ago

• Thus rural unemployment and poverty cannot be eliminated by land reformalone

• Strong government direction and leadership are needed to enact landreform legislation, ensure its implementation and provide its beneficiarieswith adequate services and ancillary services to induce higher investment,output and farm income as well as a larger marketed surplus of agriculturaloutput

CAPITAL AND FINANCE IN UNDERDEVELOPEDAGRICULTURE

• The problem of capita scarcity in underdeveloped agricultureis generally well known

• To this effect the role of financial and credit institutions inpromoting capital accumulation in this context has receivedconsiderable attention in many countries in recent times

• The major function of rural money markets is to cater fordemand for and supply of short loanable funds

• The money markets help allocate savings into investment andpromote a more rational allocation of resources

• Without this it is acknowledged that the growth of the agrarianeconomy could be significantly retarded due to lack of savingsand investment

• An efficient money market rises savings and investment bypromoting liquidity and ensuring the safety of financial assets

• Rural money markets are not seldom homogeneous. They canbe divided into organized and unorganized

IMPERFECTIONS OF AGRICULTURAL MARKETING INLDCs

• Three major ones include the following:• Infrastructural deficiencies• The weak bargaining position of producers• Producers’ lack of information (asymmetry of information)

Documents

Doc Mm Aec 515 Powerpoint Notes January 2012