Transcript AFS1 Role of Agriculture in Economic Development

The Role of Agriculture
in Economic Development
1.
2.
3.
4.
Three Fundamental Dualities of Development
Role of Agriculture in Economic Growth
Role of Agriculture in Poverty Reduction
The Role of Policy in Promoting the Role of
Agriculture in Economic Development
1. Three Fundamental
Dualities of Development
3 Fundamental Dualities of Development
1. No Development without Structural Change
–
No rise in quantities (e.g., growth of income) without changing
relationships among parts (changes in structure e.g., rise in
industry, etc.)
2. Distribution & Growth are Inseparable (causal links)
–
–
Economic reasons: incentives, capabilities
Political reasons: governance, politics, distribution of decisionmaking power
3. Demand- & Supply-Side Causes:
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–
Not just definitional sense: ex post facto, growth must be
growth both of demand and supply.
But also causal sense: ex ante growth can and does have
causes on both sides
Long-Term Growth
and Structural Change
• Growth in developing countries depends on 3
primary factors:
– Investment in physical and human capital
– Imports of capital goods and modern
intermediates: vehicles of higher-productivity
technologies and technical knowledge;
– Structural change involving shifts of both capital
and labour from less productive to more
productive sectors.
On Capital Accumulation
or Investment
• There is a systematic positive relationship between
the national investment rate and the national per
capital income level.
• Moreover, investment rates and income growth are
positively related.
• As for human capital, per capita income as well as
income growth are positively associated with literacy
at all levels (primary, secondary and tertiary).
• THUS, investment is important for economic growth
but low initial income levels tend to keep
investment down.
On Import Capacity
• Import capacity depends on export competitiveness. Also,
stability of imports depends on stability of export earnings.
– The ratio of trade (exports plus imports) to GDP rises with per
capita income levels.
– Primary exports (including agricultural exports) are half or more
of total in low-income countries.
– Growth in trade ratios during last 25 years has been more rapid
in the high-income group than in the middle- or low-income
groups.
– The ratio of trade taxes (import tariffs and export taxes) to trade
is considerably higher in low-income than in high-income
countries.
– Capital flows (both FDI and financial flows of loans and portfolio
capital) are greater for middle-income group than for the lowincome group.
– The barter terms of trade for developing countries as a group,
and primary exporters in particular, have suffered significant
declines and persistent instability.
On Import Capacity
• Thus, import capacity is important for growth
but low initial income levels tend to keep
export competitiveness and hence import
capacity down; low income levels also tend to
produce instability in import capacity.
On Structural Change
• Structural change involves:
– shift from low-productivity primary production
(agriculture etc.) to secondary (industry)
– within industry and within services (banking,
transport, insurance, etc.) from traditional to
more modern, higher-productivity forms of
organisation and technology
On Structural Change
• IN SUM:
– Increased investment requires both increased savings and
greater import capacity. But both are limited by low per
capita income related to economic structure. In short,
savings and import capacity are related to income levels
through economic structure.
– A lot of labor tends to be under-employed. This can decline
only with the growth of investment and national income.
– Deliberate policies are needed to transform economic
structure in order to accelerate growth rather than wait for
growth to transform the economic structure.
• Trade diversification, import substitution, reduced vulnerability
Growth & Distribution:
Independent or Connected?
• Trickle-down growth vs. Pro-Poor Growth
• Trickle-down: Growth is the best instrument for
poverty reduction
– “if you feed the horse enough oats, the sparrow will survive
on the highway.” John Kenneth Galbraith
• PPG (Pro-Poor Growth):
– BOTH growth rapid enough to improve the “absolute”
condition of the poor AND pro-poor enough to improve the
“relative” position of the poor
– BOTH equalize at start of process (initial conditions) AND
equalize during growth process (growth with distribution)
Growth & Distribution: Interactions?
• TRENDS & Explanations:
– Norm of rising inequality in rich and poor
countries during the last 15-20 years
– Why? technical change; trade liberalization,
capital mobility and bargaining power, weakened
fiscs and reduced state role
– Kuznets Hypothesis?
– Initial inequality tends to strongly reduce
subsequent growth
Growth & Distribution: Interactions?
• INTERACTIONS :
– Saving & Capital-Intensity
– Delayed Demographic Transition
– Content or Nature of Inequality
Growth & Distribution: Interactions?
•
Two areas of inspiration for PPG policies:
1. Policies to correct market failures in the utilization
and allocation of capital (between physical and
human capital, formal and informal sectors, capitalintensive and labor-intensive techniques, public
and private capital)
2. Policies to reduce initial inequalities
Some Sources of
Growth-Equality Complementarity
• CONCEPT: Inequality-reducing or pro-poor or
trickle-up growth
• Key is redistribution weakens structural
constraints on the utilization of labor, on
raising workers’ capacities and skills, and on
efficient allocation of capital.
– In the long run, the incomes of both the poor and
non-poor are likely to rise i.e., a process of trickleup growth.
Some Aspects of
Equality-Complementary Growth (ECG)
•
•
•
•
Unequal Access to Productive Capital
Land Inequality
Natural Resource Depletion
Credit Constraints on Human Capital
Accumulation
Aggr. Demand, Inequality & Growth
• QUESTION In any capitalist economy, savers and
investors tend to be separated. So how does macro
equilibrium (D=S) come about?
• S-side ANSWER: by the interest rate. Saving given by
HH plans. Investment must adjust to saving supply.
So saving supply determines investment demand.
• D-side ANSWER: by income and employment (in SR)
and growth and distribution (in LR). Saving mainly
from profits. Investment itself determined by
(expected) profit rate. If investment rises, savings
follows as income distribution shifts to profits. So
investment demand determines saving supply.
Aggregate Demand, Inequality
& Growth
• So change (policy or not) that reduces
inequality stimulates effective demand. So
both growth increases and inequality
decreases.
2. Role of Agriculture in
Economic Growth
The Role of Agriculture
• Paradox: Agriculture declines markedly with
economic growth
(Reason: Engel's Law + Diminishing Returns)
• Yet, neglect of AG is a persistent cause of growth
failure, widespread poverty and food insecurity. Two
apparently conflicting aspects to this role:
– High initial share in both GDP and (especially)
employment. This implies that neglecting AG would
hurt both growth and poverty reduction.
– Declining dynamic share: Yet, in long-run,
diversification into industry and modern services is
route to higher economic growth.
The Role of Agriculture
• Is there a conflict, then, between agricultural
growth and economic growth? Or at least
between economic growth and poverty
alleviation?
Agriculture/Non-Agriculture
Complementarity
• empirical evidence: high + correlation
between AG g-rate and GDP g-rate till
y<$2000-3000
• supply-side complementarity: AG Food, Labor
& Saving surpluses absorbed by non-AG
• demand-side complementarity: AG source of
effective demand for non-AG and so
stimulates growth
Agriculture/Non-Agriculture
Complementarity
• THUS, at low y, AG growth speeds up overall
growth by contributing to investment
demand and saving supply, and relieving food
and/or import supply constraints
Paradox Resolved
• At early stages of development, faster AG growth
not only does not conflict with overall growth
but is basically complementary to it. [So AG
neglect can be costly]
• But except for short periods, AG tends to grow
more slowly than the rest of the economy
implying a structural transformation.
• AG growth promotion should therefore go handin-hand with overall growth promotion
Role of Agriculture in
Poverty Reduction
Why Might AG be Good
for Poverty Reduction?
1. majority of poor are in rural areas where AG leads
employment and livelihoods
2. AG sector is labour intensive and can generate
employment for landless and under-employed
(mostly poor)
3. AG incomes is major basis of both demand and
investible resources for growth of off-farm rural
employment in informal industry and services
Why Might AG be Good
for Poverty Reduction?
4. rural & AG growth stimulates urban non-AG
growth via increased purchasing power
among rural people
5. rural & AG growth holds down migration and
so reduces urban poverty (disproportionate
among migrants)
Limits to Complementarity Between AG
and (GDP Growth & Poverty Reduction
• Natural resource and environmental limits
– More severe resource and environmental limitations of
late developers
– Limited land and growing populations reduce the land-perworker steadily.
• Investment costs: Though available, HYV/GR
technologies are not cheap options. Require
investments in rural education, agricultural research,
extension, irrigation, roads, energy, etc. From a
growth standpoint, agriculture is no longer a `bargain
sector’.
• Achieving competitiveness: Late-industrialisation is
competitive, hard and K-intensive. This makes AG
neglect likely and growth poverty-enhancing.
Variations Across Developing Countries
in Role of AG
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Income level: large variation in y-levels so structural
constraints (savings, foreign exchange, external
vulnerability) vary in severity
Agrarian structure: inequality in access to productive
assets varies; greater inequality distorts rural markets
and mal-distributes gains from growth
Technological potentials: wide variation in natural
resources or environmental pressures; AG technology
does not favour all regions equally
Country Scenarios
• Technically, the above categories together
yield 8 scenarios. It would not be very useful
to examine each policy under all these
possible scenarios. Instead, we shall use
judgement in indicating how certain scenarios
are likely to differ from others in the context
of our policy-analytic discussions later in the
volume. In any case, certain scenarios seem
rather more probable than others.
Country Scenarios
• These scenarios are…
Type
INCOME Level
AG Structure
TECH Potential
1
low-income
Unimodal
low-potential
2
low-income
Unimodal
high-potential
3
middle-income
Unimodal
high-potential
4
low-income
Bimodal
high-potential
5
middle-income
Bimodal
high-potential
4. The Role of Policy in
Promoting the Role of
Agriculture in Economic
Development
Twin Theses:
Transforming Traditional Agriculture
• T-1: Poor Peasants But Efficient Markets or "poor
but efficient“
– Poor because technology is backward. Efficient because
peasants rational, and markets efficient.
• T-2 Discriminatory And Inefficient States
– All systemic inefficiencies due solely to government
interference in markets: extracting resources from
agriculture; depressing agricultural prices or "urban bias";
public sector activities burdened the economy.
Criticisms of T-1
• Ignores profound weight of land/inequality for
mass poverty and food insecurity
• Agrarian inequality is also major cause of AG
stagnation
• Agrarian inequality also makes FACTOR
markets inefficient e.g., inverse-size-yield
relation; localized monopolies
• Inequality also is the major cause of distorted
government policies
Criticisms of T-2
• Ignores fact that state is critical for GR/HYV
technologies
• Getting AG prices "right" (1): ignores TOT
consequences
• Getting AG prices "right" (2): ignores fiscal and
other functions of AG prices
• Ignores class bias of policies
Agriculture-Economy Interactions:
Bias in Pricing
• T-2 is based on unfavourable tariffs and exchange
rate overvaluation
• Neoclassical: Peasants VS City-Dwellers + State
• Classical: Rural Rentiers VS Urban Capitalists
• So Q is: whom does high AG prices benefit?
whom do they hurt?
• Windfall gain to rentiers + [Employment Rise(?) +
Food Price Rise]
• World prices as NORM: role of DC policies
Changing Roles of Agriculture in
Economic Development
• Adjustment: a set of policy reforms designed to
activate (if stagnant) or accelerate economic growth,
usually in a "market-friendly" direction
• Two components:
– macroeconomic adjustment (stabilisation): to reduce fiscal
and external disequilibria. The policy changes involve
short-term remedies for current problems and primarily
influence the demand side of the economy.
– structural adjustment: to influence supply side of
economy both to raise growth and to avoid future fiscal
and external disequilibria
Macroeconomic And Structural
Adjustment Policy Measures
Policy
Devaluation of the exchange rate
Increase tax & reduce government expenditure
Restructuring of foreign debt
Increased interest rates
Elimination of subsidies
Decreased wages
Restricting domestic credit
Government financing through capital market
(rather than through central bank)
SAP
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Immediate objective
Reduced balance of payments deficit
Reduced budget deficit
Reduced debt payments
Stimulate savings and investment
Reduced government expenditure
Reduced demand
Reduced demand
Reduced inflationary pressure
Trade liberalisation
Market liberalisation
Privatisation of public enterprises
Increased efficiency in remaining public sector activities
Reform of labour and capital markets.
Removal of distortions in important economic sectors
Causes of Disequilibria
• (A) Endogenous
– Overvalued exchange rates
– Government borrowing
• (B) Exogenous
– International terms of trade
– International interest rates
– Structural gaps
• poorly developed physical infrastructure
• very limited marketing services
• productive & trading controlled by non-nationals
• Random Factors
AG Sector Policies Prior
to Structural Adjustment
• ISI: implications for tariffs and other policies
• National self-sufficiency and trade pessimism
• Agricultural "taxation": explicit (domestic) VS
implicit (trade)
"First Generation" AG Sector
Policy Reforms
• doing away with the taxation of AG: trade
liberalization, eliminate AG export taxes,
remove consumer food subsidies, remove
input subsidies, cut fiscal expenditure
• emphasis on high-value export crops,
commercial farmers, high-potential zones
• priority for market-led growth
"Second Generation" AG Sector Policy
Reforms
• explicit goal is poverty alleviation (including Food
Security)
• market-led growth necessary but insufficient for
poverty alleviation
• emphasis on smallholders
• government should withdraw from provision of
private goods
• government should concentrate its scarce resources
on public goods
• bottom-up, participatory, community-based,
demand-driven mode
Agriculture, Rural Development, and
Food Security
• Agriculture as an Engine for Poverty
Reduction:
– Fact 1: No country with rural population >75%
had pc food supply >2,500Kc.
– Fact 2: All countries with >3,000Kc had <60% of
population in rural areas
– Fact 3: Yet food production is often path out of
poverty for many, or even only path
– These facts are yet another manifestation of "the
paradox"
Two Engines of Growth?
• Most economists believe free trade is unfailing
"engine of growth“
• We have argued, at low y, AG is a reliable
"engine of poverty reduction & growth“
– Q: Can the two "engines" work together in
harmony? Or is there conflict?
Case Study: SSA & L-America
(Poulton, Kydd and Harvey,1999)
• Most absorbed the lessons of conventional wisdom (Twin
Theses)
• Large concentrations of poverty
• Poverty reduction did not automatically flow from higher
growth
• Liberalization did not automatically produce competitive
markets
• Failure to recognize heavy dependence of the fisc on trade
taxes
• Low level of development of technologies for sustainable
intensification
• Crucial role of a range of public expenditures/subsidies to get
agriculture moving
• Low price elasticity ←→ Major supply shifters are transport,
credit, marketing infrastructure in Africa
Do Developing Countries Have AG
Comparative Advantage?
• From World Bank to Bob Geldof, From WTO to Bono:
for price reforms
• Will the poor really benefit?
– SSA: Sachs says Africa does not have international comp
adv inAG.
– This implies Africa has comp adv in IND which seems
implausible.
– In reality, tradability of much of backward agriculture is
questionable.
– More complete AG liberalization could depress, not
stimulate, AG
– This calls the consensus of Bank-Bono-Bob-and-WTO into
question.
Promoting Rural-Urban,
Agriculture-Industry Linkages
• The logic of a complementary strategy:
– SUPPLY-&-DEMAND AG output growth can both relax food
supply constraint on non-AG growth and raise AG incomes
which will raise non-AG demand & so growth
– GROWTH-&-EQUITY But rural inequalities impede AG
growth. First, at the institutional and markets level.
Second, also by restricting demand for food.
• IF growth takes place with equity, THEN, S-&-D can
equilibrate at high levels
• IF growth is unequalizing, food demand will not rise
much, so S-&-D will equilibrate at low levels