AAE 150 Module 1: Introduction to Economic and Agricultural Development (University of the Philippines Los Baños) 2024-2025 PDF

UNIVERSITY OF THE PHILIPPINES LOS BAÑOS COLLEGE OF ECONOMICS AND MANAGEMENT Department of Agricultural and Applied Economics AAE 150: Economics of Agricultural Development Module 1 – Introduction to Economic and Agricultural Development...

UNIVERSITY OF THE PHILIPPINES LOS BAÑOS COLLEGE OF ECONOMICS AND MANAGEMENT Department of Agricultural and Applied Economics AAE 150: Economics of Agricultural Development Module 1 – Introduction to Economic and Agricultural Development 1 Introduction History will tell us that people have always advocated in favor of economic development. The justification of doing so is to achieve an improvement in people’s well-being. Before an in-depth assessment of the many dimensions of development, it is first important to understand its meaning. This module presents the definition and nature of economic development. A specific section is devoted on the importance of the agriculture sector in development. Learning Outcomes At the end of the session, the students should be able to: 1. explore the definitions of development and economic development, and 2. discuss the nature of development economics and discuss the role of agriculture in development. I. DEFINITION OF DEVELOPMENT AND ECONOMIC DEVELOPMENT A. Development According to Norton et. al., (2015), development can be defined as “a change over time, typically involving growth and expansion”. We focus on two concepts in this definition. “Change over time” refers to three components: the condition before, the condition after, and the processes in between. We focus on the time element, and not a specific period of time. This is the reason why most indicators of development involved the analysis of time-series data or data involving many time periods, for example monthly, quarterly, and yearly data. Development also focuses on “growth and expansion” or the improvement of an economy, and not disimprovement or deterioration. As we will see later in the course, this definition of development is quite limiting, especially in modern times where development usually integrates the concepts of “equity” or distribution of wealth and quality of life or raising the standard of living of people. 1 This course material is a consolidated work of Assistant Professors Cenon D. Elca, and Geny F. Lapiña of the Department of Agricultural and Applied Economics, College of Economics and Management, University of the Philippines Los Baños and was prepared for educational purposes only. Use of this material must be limited only for personal use of enrolled students of AAE 150. No part of this material may be reproduced, distributed, exhibited in any form or manner, quoted, or cited without the written consent of the author. Page 1 of 5 The same authors defined economic development as it “involves changes in people’s standard of living”. The focus of this definition is the “people” of a particular nation. The ultimate target, therefore, of economic development is people. Aspects of institutions or the environment may change, but any changes in these aspects must be centered on individuals living on earth. Standard of living refers to people’s basic needs to survive. These basic needs may include food, clothing, shelter, and health, among others. And to be able to live, there’s a minimum requirement. For example, for food, the minimum intake of an individual should be roughly 2,000 kilocalories per day. Economic development also involves “improvement in economic, political, and social aspects of a nation”. This means that economic development is multi-faceted or it involves many characteristics. This is the reason why economic development includes many indicators and not only limited to growth (i.e. GDP growth). Some indicators of economic development are population growth, infant mortality, unemployment rate, and education and illiteracy, among others. II. NATURE OF DEVELOPMENT Development and economic development can be considered as two sides of the same coin. There are pros and cons of development. Development, in general, provides opportunities to uplift the lives of people. For example, development can facilitate the eradication of diseases that can lower the number of people dying. Development gives choices to individuals by providing them alternative goods and services to choose from. The United Nations through its Millennium Development Goals (UN n.d.) and Sustainable Development Goals (UN n.d.) has set forth the framework to eliminate poor and hungry people across all nations of the world. The other side of the coin is the negative consequences of development. The pursuit of economic growth can lead to damages to the environment. For example, industrialization or the rise of factories led to deforestation, which removed the many environmental services provided for by trees. Some industries also die to make room for the more relevant and in-demand products and services required by the modern consuming public. For example, there used to be a telecommunication service provider called P&T in the past. But because consumers demand more quality services, Smart and Globe, and now Dito (3rd telco player), emerges as new players in the telecommunication industry. Because some industries close, people will also be unemployed as a result of business closure. For better appreciation, we should also discuss the history of development. What was the classical or traditional view and what were the achievements in terms of development? Economic development which focuses on economic growth advocates for the efficient allocation of scarce resources like land, water, and energy, among others. Consumers are assumed to maximize utility given prices of demanded products, and producers or firms are assumed to maximize profit given prices of inputs. The interaction of supply through profit maximization and demand through utility maximization will give the efficient point of production and consumption, which in turn corresponds to the equilibrium price and equilibrium quantity. This efficient condition between firms and consumers will lead to economic growth when projected to the whole economy. The Page 2 of 5 major assumptions of this neoclassical view are: 1) both economic agents (e.g. producers and consumers) are rational, meaning they always make the right decisions, 2) they always follow what is good for them or they always promote their self-interest, and 3) there’s perfect information in the market or both producers and consumers are well aware of the product’s price, quality and other information related to the product being sold in the market. The traditional view in the past was to focus on economic growth or basically GDP growth, and that the benefits given to the wealthy will eventually trickle down to the poor or the less disadvantaged. This economic growth was also assumed to benefit other industries of an economy, leading to structural transformation. However, despite the focus on economic growth, the evidence still shows that poverty, unemployment, and inequality remained in many countries of the world. This is especially true in many countries of Africa and South Asia. This is the main reason why the term “growth without development” arose in the 1970s. This means that the economy of a particular country may be growing or improving, but the quality of life of its people may remain the same or even deteriorate. Based on this, economists made a move to advocate for a change in the development paradigm, that is, development must go beyond economic growth. In the Philippines, what does the evidence tell us about the link of economic growth and an indicator of well-being?  Well-being in this case is represented by the poverty incidence.  Economic growth is represented by the real GDP growth rate, which represents how fast the Philippine economy is growing. A higher growth rate is preferred.  Poverty incidence is the percentage of people who are below the poverty line. To put it simply, it indicates the number of people who are poor.  A poverty incidence of 25%, for example, means that 25 people are poor for every 100 Filipinos, or one out of every 4 Filipinos is poor (Figure 1.1). 100 10 GDP Growth (%), Green Line Graph Poverty Incidence (%), Red Bar 90 9 80 8 70 6.0 6.3 7 5.6 60 6 Graph 50 4.0 5 3.8 40 4 30 24.9 26.6 26.3 25.2 26.3 3 20 2 10 1 0 0 2003 2006 2009 2012 2015 Source of basic data: PSA, 2015 Figure 1.1 Trends in poverty incidence and GDP growth in the Philippines, various years Page 3 of 5   The above trend tells us that there’s no marked improvement in poverty reduction from 2003 to 2015.  However, the economy is generally growing except for the 2006 to 2009 period, where there was a global financial crisis.  This crisis is also called an asset bubble where many borrowers in the United States started to default their loans, forcing major credit companies to declare bankruptcy and eventually close down.  This crisis had negative spillover effects on other countries of the world.  Without this crisis, the GDP growth of the Philippines should have been a straight upward sloping line.  The point here is: there’s a disconnect between economic growth and poverty reduction. Growth has no trickling down effect on the poor. How do we then measure and in turn represent economic growth and development? How do we distinguish the two? Economic growth is generally associated with GDP, whether actual value, rate of growth, or share of GDP per population (i.e. GDP per capita), among others. On the other hand, economic development is a more encompassing concept. It should include economic growth plus a measure of standard of living. For example, the human development index (HDI) of the United Nations tries to combine many economic, social and political indicators into one single metric that would represent economic development of a particular nation. III. ROLE OF AGRICULTURE IN DEVELOPMENT A. It provides food and vital raw materials for the rest of the economy A basic strategy in eliminating poverty and hunger in any developing country is to focus efforts on the agriculture sector. This is the case since agriculture plays a crucial role in the whole economy of any nation. For example, agriculture is the provider of food and vital raw materials to the other two sectors of the economy (i.e. industry and services). Agriculture is the main source of food staples/carbohydrates (rice, white corn, cassava, sweet potato, saba, and ubi) and protein (pork, chicken meat, beef, carabeef, eggs, and fish) of people living in urban areas. Agriculture also provides the raw materials to the processing industries like raw mango and pineapple to the canning industry, wood and seashells for the handicraft industry, abaca fiber used for printing money, and rubber milk for the tire industry, among others. B. It provides a market for the products of the non-agricultural economy, as a buyer of farm inputs as well as goods and services produced in the non-agricultural economy Agriculture can also serve as the final destination of the products produced by industry and services sectors. For example, manufactured products like fertilizer, pesticides and herbicides, and farm machineries are marketed to the agriculture sector. Industrialized products like fuel and oil are also consumed by agriculture. Finally, agriculture avail many services like credit and loans. Page 4 of 5  C. Agriculture is a crucial sector in eliminating poverty and achieving zero hunger by 2020 The third important role of agriculture to the whole economy is its function in attaining the two goals of eliminating poverty and achieving zero hunger by 2030. What’s the basis for targeting the elimination of poverty and zero hunger by 2030? This is contained in the global initiative of the United Nations called SDGs or Sustainable Development Goals. Before it was called MDGs or Millennium Development Goals. This means that for developing countries like the Philippines, it must incorporate these goals in its development plans. There are currently 17 development goals, and the first two are: Goal 1: No poverty, and Goal 2: Zero hunger. Other goals focused on education, health, gender equality, sustainable development, and climate change, among others. What’s the connection between the agriculture sector and the UN SDGs? The idea is any development plan geared towards the achievement of Goals 1 and 2 should focus on the agriculture sector, since the concentration of the poor in most developing countries like the Philippines is in agriculture. Being poor is also associated with living in rural areas. There’s a greater proportion of poor people living in rural areas than in urban areas. And the primary source of income of families living in rural areas is in agriculture-related activities. So agriculture should be the priority sector in the elimination of poverty and ending hunger by year 2030. Summary  Development is a change over time, typically involving growth and expansion.  Economic development is a multifaceted concept. It involves improvement in economic, political, and social aspects of a nation.  Economic growth is a necessary but not sufficient condition of economic development.  The agriculture sector plays an important role in economic development. References Norton, G.W., J. Alwang, and W. A. Masters. 2015. Economics of Agricultural Development: World Food Systems and Resources. London and New York: Routledge Taylor and Francis Group. Philippine Statistics Authority. 2015. Selected statistics on GDP growth and poverty incidence. United Nations. nd. Millennium Development Goals https://www.un.org/millenniumgoals/. United Nations. nd. Sustainable Development Goals https://www.un.org/sustainabledevelopment/sustainable-development- goals/. Page 5 of 5