Development Economics PDF

DEVELOPMENT ECONOMICS SOCSC13 R.LANCE CHUA, MA PPT5  Agricultural Transformation and Rural Development #1 The Microeconomics of Farmer Behavior and Agricultural Development #1 THE MICROECONOMICS OF FARMER BEHAVIOR FR We can identify three broad stages in the evolution of agricult...

DEVELOPMENT ECONOMICS SOCSC13 R.LANCE CHUA, MA PPT5  Agricultural Transformation and Rural Development #1 The Microeconomics of Farmer Behavior and Agricultural Development #1 THE MICROECONOMICS OF FARMER BEHAVIOR FR We can identify three broad stages in the evolution of agricultural production The first stage: the pure, low-productivity, mostly subsistence-level traditional (peasant) farm, still prevalent in Africa The second stage: what might be called diversified or mixed family agriculture, where a small part, of the produce is grown for consumption and a significant part for sale to the commercial sector, as in much of Asia The third stage: represents the modern farm, exclusively engaged in high-productivity, specialized agriculture geared to the commercial market, as in developed countries, and often found in the highly urbanized developing countries #1 THE MICROECONOMICS OF FARMER BEHAVIOR FR Agricultural modernization in mixed-market developing economies may be described in terms of the gradual but sustained transition from subsistence to diversified and specialized production But such a transition involves much more than reorganizing the structure of the farm economy or applying new agricultural technologies Transforming traditional agriculture often requires: 1. Adapting the farm structure to meet the demand for increased production 2. Profound changes affecting the entire social, political, and institutional structure of rural societies  FR SUBSISTENCE FARMING: RISK AVERSION, UNCERTAINTY AND SURVIVAL Without such changes, agricultural development will either continue to lag greatly behind or, more likely, simply widen the already sizable gap between the few wealthy large landholders and: 1. the masses of impoverished tenant farmers 2. smallholders 3. landless laborers We first consider the evolution of the agricultural system of a developing nation over time: 1. from a predominantly traditional, subsistence-level and small-scale peasant orientation 2. to more diversified operations 3. and eventually, to the rise of fully commercial enterprises, though still often family based  FR SUBSISTENCE FARMING: RISK AVERSION, UNCERTAINTY AND SURVIVAL On the classic traditional (peasant) subsistence farm, most output is produced for family consumption (although some may be sold or traded in local markets), and a few staple foods are the chief sources of nutrition: 1. Cassava 2. Wheat 3. Barley 4. Sorghum 5. Rice 6. Potatoes or corn SUBSISTENCE FARMING: RISK AVERSION, UNCERTAINTY AND SURVIVAL On the classic traditional (peasant) subsistence farm, most output is produced for family consumption (although some may be sold or traded in local markets), and a few staple foods are the chief sources of nutrition: 1. Cassava 2. Wheat 3. Barley 4. Sorghum 5. Rice 6. Potatoes or corn  Output and productivity are low, and only the simplest traditional methods and tools are used Capital investment is minimal; land and labor are the principal factors of production The law of diminishing returns is in operation as more labor is applied to shrinking (or shifting) parcels of land  Banes of the peasant’s existence: 1. Failure of the rains 2. Appropriation of the land 3. Appearance of the moneylender to collect outstanding debts Labor is underemployed for most of the year, although workers may be fully occupied at seasonal peak periods such as planting and harvest The traditional farmer (peasant) usually cultivates only as much land as his family can manage with - out the need for hired labor – - although many traditional farmers intermittently employ one or two landless laborers  In much of sub-Saharan Africa, agriculture is still largely in this subsistence stage, as it is in pockets in Asia and even Latin America The Green Revolution has bypassed much of Africa But in spite of these: 1. relative backwardness of production technologies 2. misguided convictions of some foreigners who attribute the peasants’ resistance to change as a sign of incompetence or irrationality  - the fact remains that given the: 1. nature of the peasants’ environment 2. uncertainties that surround them 3. need to meet minimum survival levels of output 4. rigid social institutions into which many peasants, but particularly women, are locked, most farmers do behave in an economically rational manner when confronted with alternative opportunities  Some insight into the economics of subsistence agriculture is provided by the traditional two-factor neoclassical theory of production in which land is fixed, labor is the only variable input, and profit is maximized Specifically, the theory provides an economic rationale for the observed low productivity of traditional agriculture in the form of the law of diminishing marginal productivity  Unfortunately, this theory does not satisfactorily explain why small-scale farmers are often resistant to technological innovation in farming techniques or to the introduction of new seeds or different cash crops According to the standard theory, a rational income or profit- maximizing farm or firm will always choose a method of production that will increase output for a given cost (in this case, the available labor time) or lower costs for a given output level  But the theory is based on the crucial assumption that farmers possess: 1. “perfect knowledge” of all technological input-output relationships 2. current information about prevailing factor and product prices This is the point at which the simple theory loses a good deal of its validity when applied to the environment of subsistence agriculture Furthermore, when access to information is highly imperfect, the transaction costs of obtaining this information are usually very high  Given price uncertainty, traditional (peasant) farmers often face a wide range of possible prices rather than a single input price Along with limited access to credit and insurance, such an environment is not conducive to the type of behavior posited by neoclassical theory and goes a long way toward explaining the actual risk-averse behavior of peasant farmers, including their caution in the use of purchased inputs such as fertilizer  Subsistence agriculture is thus a highly risky and uncertain venture It is made even more so by the fact that human lives are at stake In regions where farms are extremely small and cultivation is dependent on the uncertainties of variable rainfall, average output will be low, and in poor years, the peasant family will be exposed to the very real danger of starvation In such circumstances, the main motivating force in the peasant’s life may be the maximization, not of income, but of the family’s chances of survival  Accordingly, when risk and uncertainty are high, small farmers may be very reluctant to shift from a traditional technology and crop pattern that over the years they have come to know and understand to a new one that promises higher yields but may entail greater risks of crop failure When sheer survival is at stake, it is more important to avoid a bad year (total crop failure) than to maximize the output in better years  Risk-avoiding traditional farmers are likely to prefer a technology of food production that combines a low mean per- hectare yield with low variance (fluctuations around the average) to alternative technologies and crops that may promise a higher mean yield but also present the risk of a greater variance  Many programs to raise agricultural productivity among small farmers in Africa and elsewhere have suffered because of failure to provide adequate insurance (both financial credit and physical “buffer” stocks) against the risks of crop shortfalls, whether these risks are real or imagined An understanding of the major role that risk and uncertainty play in the economics of subsistence agriculture – - would have prevented early and unfortunate characterizations of subsistence or traditional farmers - - as technologically backward, irrational producers with limited aspirations or just plain “lazy natives,” as in the colonial stereotype  Moreover, in parts of Asia and Latin America where agriculture has performed poorly, a closer examination of why traditional (peasant) farmers have apparently not responded to an “obvious” economic opportunity will often reveal that: 1. the landlord secured much if not all of the gain 2. the moneylender captured the profits 3. the government’s “guaranteed” price was never paid 4. complementary inputs (fertilizers, pesticides, assured supplies of water, adequate credit, etc.) were never made available or their use was otherwise more problematic than outsiders understood  In particular, when peasants have reason to be concerned about the risk of eviction or expropriation—whether by landlords or by the state—incentives for those who work the land to invest in it will be proportionately reduced Farmers will consider the expected value of the marginal product of any inputs they apply, such as fertilizer, which will be lowered in relation to the probability they place on expropriation  For example, if fertilizer lasts for two growing seasons but the peasant is sure her land will be expropriated as soon as someone with the power to do so sees that the land has already been fertilized, then too little fertilizer will be used from the social point of view, because the peasant will consider the benefits of the fertilizer as if it disappeared after just one season (while its price is not lowered) This type of effect has been confirmed by careful econometric evidence from China The Economics of Sharecropping and Interlocking Factor Markets  The phenomenon of risk aversion among peasant farmers in the presence of high land inequality also helps explain the prevalence of sharecropping throughout much of Asia and parts of Latin America Although different types of relationships may arise between the owners of land and the people who work on them (e.g., the farmers could rent or act as wage laborers), sharecropping is widespread Sharecropping occurs when a peasant farmer uses the landowner’s farmland in exchange for a share of food output, such as half of the rice or wheat grown  The landlord’s share may vary from less than a third to more than two-thirds of output, depending on local labor availability and the other inputs (such as credit, seeds, and tools) that the landlord provides The poor incentive structure of sharecropping lends itself to inefficiency Alfred Marshall observed that the farmer was paid only part, rather than all, of his marginal product and would rationally reduce work effort accordingly  This view was challenged in the 1960s by Steven Cheung, who argued that profit-maximizing landlords would establish contracts requiring adequate work effort from the tenant as well as stipulating each party’s share of the output If effort was not too difficult to monitor, then if one tenant failed to live up to his part of the bargain, he would be replaced by another tenant who was willing to work harder; as a result, sharecropping would be as efficient as any other contractual form Cheung’s theory is known as the monitoring approach  The monitoring approach was popular for two decades, and it was difficult to test because of endogeneity For example, only low-productivity people may choose to enter into sharecropping contracts Some scholars believe that landlords may offer tenants an option of either sharecropping or pure rental contracts precisely because higher-ability people more often choose pure rental arrangements High-ability farmers are able to get the full value of their high marginal product, while this is not as attractive to lower- ability farmers  The motivation may be to enable landlords to squeeze more profits out of the renters, charging higher effective rents for pure rental contracts than for sharecropping contracts—but not too high or even high-ability farmers would choose sharecropping This approach is known as the screening hypothesis of sharecropping However, Radwan Ali Shaban identified farmers who farmed plots that they owned and who also leased out additional farmland under a sharecropping contract  By comparing the same farmers’ behavior under different contractual arrangements, Ali Shaban controlled for factors specific to individual farmers that cannot be easily observed He found that farmers used fewer inputs and produced less output on the sharecropped land than on their own land, all else being equal These results provide evidence that sharecropping is less efficient than farming one’s own land, just as Marshall predicted  A final approach suggests that sharecropping is relatively efficient after all, in that it makes the best out of an inherently uncertain and risky situation for both parties SCENARIO #1: If the landlord paid the tenant a straight wage, which would be efficient if the tenant always gave his full effort and it didn’t cost the landlord anything to make sure of this, the tenant would have every incentive to accept the money and not work hard SCENARIO #2: If the tenant paid a straight rent for the land, he would face the appalling risk that there would be a particularly lean year, such as a drought, and there would not be enough food left after the rent was paid to prevent starvation  Thus, sharecropping represents a compromise between the risk to the landlord that the tenant will not do much work and the risk to the tenant that a fixed rent will in some years leave him no income So even though sharecropping, with its poor work incentives, would be inefficient in a world of perfect certainty, in the real world, with inequality in land ownership as well as uncertainty, it is “as efficient as we can get.” However, this arrangement is necessary only because of extreme inequality of land ownership  Farmers who own their own farms do not generally choose sharecropping contracts for themselves As a result, the enormous efficiency loss is not negated by this important explanation of why sharecropping arises Where tenancy reform is well designed and enforced, giving sharecroppers a larger share of the produce and security of tenure on the land, the result can be not only higher income for the tenants but also greater overall efficiency A clear example is the tenancy reform policy implemented in the Indian state of West Bengal in the late 1970s  The explanation is clear from what we have just established: that a higher product share gives greater work effort incentives, and greater security of tenure gives greater investment incentives Land reform that distributes ownership of “land to the tiller” can provide similar and superior improvements in incentives, if needed complementary inputs are provided  The economic and social framework in which sharecropping takes place is one of extraordinary social inequality and far- reaching market failure When the peasant faces his landlord, he often faces not only the individual whom he must persuade to rent him productive land but at the same time his prospective employer, his loan officer, and even his ultimate customer for any crops he wishes to sell Such conditions, an example of interlocking factor markets, provide the rural landlord with abundant sources of monopoly and monopsony power  Interlocked-factor-market sharecropping does have the resource allocation advantage that it is in the landlord’s interest to see to it that his sharecropper receives credit from the lowest-cost source At the same time, the personal nature of interlinkage gives the dominant party far-ranging leverage and acts as a barrier to entry that restricts competition that might ultimately benefit the peasant For many analysts, a study of interlinkage involving a dominant landlord often concludes that nothing short of land reform will reliably affect the tenant’s welfare #2 Improving Small-Scale Agriculture  In most developing countries, new agricultural technologies and innovations in farm practices are preconditions for sustained improvements in levels of output and productivity In many parts of Africa, however, increased output in earlier years was achieved without the need for new technology simply by extending cultivation into unused but potentially productive lands Almost all of these opportunities have by now been exploited, and there is little scope for further significant or sustainable expansion  Two major sources of technological innovation can increase farm yields Unfortunately, both have somewhat problematic implications for agricultural development FIRST SOURCE: the introduction of mechanized agriculture to replace human labor The introduction of laborsaving machinery can have a dramatic effect on the volume of output per worker, especially where land is extensively cultivated and labor is scarce  For example, one man operating a huge combine harvester can accomplish in a single hour what would require hundreds of workers using traditional methods But in the rural areas of many developing nations, where land parcels are small, capital is scarce, and labor is abundant, the introduction of heavily mechanized techniques is often ill suited to the physical environment and has the effect of creating more rural unemployment without necessarily lowering per-unit costs of food production  Importation of such machinery can require large tracts of land (and thus the consolidation of small holdings) and tends to exacerbate the already serious problems of rural poverty and underemployment And if mechanized techniques exclude women, the male- female productivity gap could widen further, with serious repercussions  SECOND SOURCE: land augmenting variables: 1.) biological (hybrid seeds and biotechnology) 2.) water control system (irrigation) 3.) chemical innovations (fertilizer, pesticides, insecticides, etc.) all of which have their specific problems They improve the quality of existing land by raising yields per hectare  Only indirectly do they increase output per worker Variables that represent major scientific advances in modern agriculture: improved seeds advanced techniques of irrigation crop rotation the increasing use of fertilizers, pesticides, and herbicides new developments in veterinary medicine and animal nutrition These measures are often technologically scale-neutral; theoretically, they can be applied equally effectively on large and small farms  They do not necessarily require large capital inputs or mechanized equipment They are therefore particularly well suited for tropical and subtropical regions, and offer enormous potential for raising agricultural output in developing nations and have been highly effective in doing so, particularly in Asia Again, the major challenge is to extend this success to sub- Saharan Africa, which will in some cases need new innovations  There are also important environmental challenges in many parts of the developing world, including: risks posed by a falling water table salination other resource degradation - - for which well-designed government policy and in some cases restored collective action mechanisms are usually necessary #3 Institutional and Pricing Policies: Economic Incentives  Unfortunately, although the green revolution varieties of wheat, corn, and rice, together with needed irrigation and chemicals, are scale-neutral and thus offer the potential for continued small-farm progress, the social institutions and government economic policies that accompany their introduction into the rural economy are often not scale- neutral On the contrary, they often merely serve the needs and vested interests of the wealthy landowners  Because the new hybrid seeds require access to complementary inputs such as: irrigation fertilizer insecticides credit agricultural extension services if these are provided only to a small minority of large landowners, one impact of the green revolution can be (as in parts of South Asia and Mexico) the further impoverishment of many peasants  Large landowners, with their disproportionate access to these complementary inputs and support services, are able to gain a competitive advantage over smallholders and eventually drive them out of the market Large-scale farmers obtain access to low-interest government credit, while smallholders are forced to turn to moneylenders The result has all too often been the further widening of the gap between rich and poor and the increased consolidation of agricultural land in the hands of a very few so-called progressive farmers  A developmental innovation with great potential for alleviating rural poverty and raising agricultural output can thus turn out to be antidevelopmental if public policies and social institutions militate against the active participation of the small farmer in the evolving agrarian structure Another critical area of many past and some continued failures in government policies relates to the pricing of agricultural commodities, especially food grains and other staples produced for local markets  Many governments in developing nations, in their headlong pursuit of rapid industrial and urban development, maintained low agricultural prices in an attempt to provide cheap food for the urban modern sector Farmers were paid prices below either world competitive or free- market internal prices The relative internal price ratio between food and manufactured goods (the domestic terms of trade) thus turned against farmers and in favor of urban manufacturers With farm prices so low—in some cases below the costs of production—there was no incentive for farmers to expand output or invest in new productivity raising technology  As a result, local food supplies continually fell short of demand, and many developing nations, especially in sub-Saharan Africa, that were once self-sufficient in food production had to import food Many development economists therefore argue that if governments are to promote further increases in agricultural production that make a larger impact on poverty reduction through Green Revolution technologies, they must make not only the appropriate institutional and credit market adjustments but also continued progress to provide incentives for small and medium-size farmers by implementing pricing policies that truly reflect internal market conditions Adapting to New Opportunities and New Constraints As a route out of poverty and toward genuine rural development, enhanced cereal productivity (the classic Green Revolution characteristic) represents only a small part of the agricultural opportunities The best opportunities for sales to growing urban areas are generally found in higher value-added activities, particularly horticulture (fruits, vegetables, and cut flowers) and aquaculture  These products, along with organic and perhaps Fair Trade versions of some otherwise traditional developing country exports such as coffee and spices, also provide good opportunities for higher-value exports But small farmers will need special organization and assistance to take advantage of new opportunities As the 2008 World Development Report concludes, “Smallholders can bargain better as a group than as individuals” “So a high priority is to facilitate collective action through producer organizations to reach scale in marketing and bargain for better prices”  An opportunity—which also poses a potential threat—is the growing activity of foreign investment in developing country farmland, also known as land grabbing An IFPRI report estimated that from 2006 to 2009, 15 to 20 million hectares of developing country farmland had been transferred An example is the 2008 deal of South Korea to acquire 690,000 hectares in Sudan Foreign ownership and long-term leasing of farmland can lead to some better-paying job creation, training, access to better techniques, and new export markets  But there is a real threat that many farmers will: lose access to their traditional rights to use land there may be net job losses water shortages environmental degradation of adjacent lands may accelerate These and other potential risks are greater when there are governance shortcomings, including corruption, and when women and other poor and vulnerable claimants are not empowered  One of the biggest constraints looking ahead is the looming environmental problems driven by global warming and climate change, which are expected to most negatively affect sub-Saharan Africa and South Asia Smaller and poorer farmers are likely to be affected severely, because of their lower access to irrigation and other inputs and generally lesser capacity to adapt Although, ironically, with their smaller use of irrigation and different crop mix, their absolute income declines may be less than those of richer farmers  Although the majority of global warming problems are caused by developed countries, to the extent that cultivated areas in developing countries continue to increase by means of eliminating remaining forested areas, climate change problems will only worsen This “agricultural extensification,” not only in forests but also in drier and other sensitive lands, further brings the risk of local soil degradation and lost environmental services such as maintaining water and air quality  The losses of wetlands and of biodiversity also lead to substantial national (as well as international) costs Moreover, intensification of agriculture has often brought with it the misuse of agrochemicals, which can entail large human and ecosystem costs #4 Conditions for Rural Development  Conditions for rural development We can draw three conclusions regarding the necessary conditions for the realization of a people-oriented agricultural and rural development strategy First Conclusion: Land Reform Farm structures and land tenure patterns must be adapted to the dual objectives of increasing food production and promoting a wider distribution of the benefits of agrarian progress, allowing further progress against poverty  Agricultural and rural development that benefits the poor can succeed only through a joint effort by the government and all farmers, not just the large farmers A first step in any such effort, especially in Latin America and Asia, is the provision of secured tenure rights to the individual farmer The small farm family’s attachment to their land is profound It is closely bound up with their innermost sense of self- esteem and freedom from coercion  When they are driven off their land or they are gradually impoverished through accumulated debts, not only is their material well-being damaged, but so is their sense of self- worth It is for these humane reasons as well as for reasons of higher agricultural output and the simultaneous achievement of both greater efficiency and more equity that land reform is often proposed as a necessary first condition for agricultural development in many developing countries In most countries, the highly unequal structure of land ownership is a key determinant of the existing highly inequitable distribution of rural income and wealth  It is also the basis for the character of agricultural development When land is very unevenly distributed, in quality as well as in quantity, rural peasants can have little hope for economic advancement through agriculture Land reform usually entails a redistribution of the rights of ownership or use of land away from large landowners in favor of cultivators with very limited or no landholdings  It can take many forms: the transfer of ownership to tenants who already work the land to create family farms (Japan, South Korea, Taiwan) transfer of land from large estates to small farms or rural cooperatives (Mexico) or the appropriation of large estates for new settlement (Kenya) All go under the heading of “land reform” and are designed to fulfill one central function: the transfer of land ownership or control directly or indirectly to the people who actually work the land Tenancy reform as in West Bengal can also yield favorable efficiency and distributional benefits  If programs of land reform can be legislated and effectively implemented by the government, the basis for improved output levels and higher standards of living for rural peasants will be established Unfortunately, many land reform efforts have failed because governments (especially those in Latin America) bowed to political pressures from powerful landowning groups and failed to implement the intended reforms But even an egalitarian land reform program alone is no guarantee of successful agricultural and rural development Second Conclusion: Supportive Policies The full benefits of small-scale agricultural development cannot be realized unless government support systems are created that provide the necessary incentives, economic opportunities, and access to needed credit and inputs to enable small cultivators to expand their output and raise their productivity  Though land reform is essential in many parts of Asia and Latin America, it is likely to be ineffective and perhaps even counterproductive unless there are corresponding changes in: Change #1 rural institutions that control production: banks moneylenders seed fertilizer distributors  Change #2 In supporting government aid services: technical and educational extension services public credit agencies, storage and marketing facilities rural transport and feeder roads Change #3 in government pricing policies with regard to both inputs removing factor price distortions outputs (ensuring market-value prices for farmers)  Even where land reform is less necessary but where productivity and incomes are low (as in parts of Africa and Southeast Asia), this broad network of external support services, along with appropriate governmental pricing policies related to both farm inputs and outputs, is an essential condition for sustained agricultural progress Third Conclusion: Integrated Development Objectives Rural development, though dependent primarily on small-farmer agricultural progress, implies much more. It encompasses: (a) efforts to raise both farm and nonfarm rural real incomes through job creation, rural industrialization, and other nonfarm opportunities and the increased provision of education, health and nutrition, housing, and a variety of related social and welfare services (b) a decreasing inequality in the distribution of rural incomes and a lessening of urban-rural imbalances in incomes and economic opportunities; Third Conclusion: Integrated Development Objectives Rural development, though dependent primarily on small-farmer agricultural progress, implies much more. It encompasses: (c) successful attention to the need for environmental sustainability— limiting the extension of farmland into remaining forests and other fragile areas, promoting conservation, and preventing the harmful misuse of agrochemicals and other inputs (d) the capacity of the rural sector to sustain and accelerate the pace of these improvements over time  The achievement of these four objectives is vital to national development More than half of the population of the developing world is still located in rural areas By restoring a proper balance between urban and rural economic opportunities and by creating the conditions for broad popular participation in national development efforts and rewards, developing nations will have taken a giant step toward the realization of the true meaning of development