Beyond Agriculture: A Greater Role for Urban Industrial Growth?

Stefan Dercon

University of Oxford

and International Growth Centre

Background

“In Search of a Strategy: Rethinking Agriculture-led Growth in Ethiopia”

• Started from a key question:

“how to achieve faster growth through commercialization of agriculture, with emphasis on cereals”

• Turned into two questions:– How to get growth in agriculture?

– The role of agriculture in overall growth in the economy?

• Focus on grains, less on non-food crops and livestock.

• Attempt at consolidation

Method

• Theory revisited

• Meta-analysis on evidence

– Relevant comparative evidence from other settings

– Critical review of evidence on Ethiopia

• Changed my mind on many points during course of this work.

Percent of Pop’n in Ag. Sector

Income per Capita

US and other OECD nations

Ethiopia

We know what is at stake:Iron Law of Economic Development

Data from the World Bank

Percent of Pop’n in Ag. Sector

Income per Capita

China in 1980s

Take China…

Transformation Path

Percent of Pop’n in Ag. Sector

Income per Capita

China in 20 years:

from 80% to 55% in agriculture

Looking for growth…

• Our interest: growth, i.e. not just 20% more GDP, but a process in which gains multiply themselves....

• In a rare economy: one that has stuck to a reasoned strategy, ADLI, for 15 years, including some new incarnations (PASDEP); a version of ‘agriculture first’

• I will take a critical look at this (with some credentials)

Agriculture first• Rational case

• Story about high returns and linkages and multipliers from initial agricultural productivity increases

• Resulting in high growth and poverty reduction,

• Based on current and historical evidence

• Emotive case

• Political economy case

Key lessons

• Growth in the urban economy is now ESSENTIAL in Ethiopia to achieve faster growth in agriculture and faster poverty reduction. The conditions in Ethiopia are not right for an agriculture first strategy.

• Current growth strategy in agriculture has positive parts but necessary elements are just plain missing.

Structure

1. Revisit the comparative evidence

2. Agriculture first in Ethiopia: prices and linkages

3. Agricultural constraints on the agricultural transformation

Recent evidence

• Massive growth in output+100% since 1996/97, +12% per year in last 5 years

+200% wheat, +150% maize, 60% teff, 80% sorghm

• Huge area expansion+44% since 1996/97, +5% per year in last 5 years

+85% wheat, +70% maize, 20%teff, 60% sorghum

• Strong yield increase+40% since 1996/97; +6% per year in last 5 years

+60% wheat,50% maize, +30% teff, 13% sorghum

The area expansion?

• Area cultivated (cereals) per dweller constant since 1980!

• PASDEP forecasted 1% area growth in last 5 years, almost a third more

• Where does this land come from?

The yield expansion

• Not easily explained by inputs

2007/08 2001/02 1997/98

Fertiliser Applied area (share in total area cultivated - %) 39.0 42.8 32.3

Fertiliser application (total quintals/ total hectares) 0.45 0.30 0.37

Fertiliser application (quintals per hectare of fertiliser

applied area)

1.16 1.00 1.15

Improved seed applied crop area (% of crop area) 4.7 3.5 2.4

Pesticide applied crop area (% of crop area) 20.8 10.8 12.0

Irrigated crop area (% of crop area) 1.1 1.3 0.6

Extension package covered crop area (% of crop area) 14.5

Table 3: Modern Input Use 1997/98-2007/08 on Cereals

Source: Calculations from Seyoum Taffesse (2008) using CSA data (CSA (September 1998), CSA (July 2003b), and CSA (August 2008)) for all cereals.

The international comparison Maize Wheat Cereals (FAO definition)

93/03 05/07 08 93/03 05/07 08 93/03 05/07 08

Kenya 0% 30% 34% -32% -15% -2% -25% -10% 10%

Malawi 20% 59% 64% 89% 28% 47% -1% 29% 34%

Tanzania 46% 108% 115 -3% 47% 68% 15% 58% 63%

Uganda 1% 54% 59% -27% 6% 21% -15% 20% 24%

India -8% 16% 20% -50% -30% -20% -48% -37% -23%

China -67% -57% -55% -65% -59% -53% -65% -59% -53%

Vietnam -37% -37% -35% -67% -61% -60%

USA -80% -75% -74% -51% -32% -21% -76% -72% -71%

LDC 35% 66% 71% -9% 3% 18% -11% 5% 8%

Table 4: Percentage Yield Gap of Ethiopia compared to selected countries in selected years

Source: FAOSTAT data up to 2007. Data for 2008 are from FAO (2009) for Ethiopia compared to 2005-07 for other countries. LDC and Landlocked LDC are less developed

countries and the least developed countries that are landlocked (all based on FAO definitions).

The fastest green revolution in history?

• Or something is going wrong with the data?

• In 5 years, wheat yield growth of 50%+, faster than ever recorded in China or India (but still below 120% target in PASDEP)

• An appeal to transparent auditing procedure!

Structure

1. Revisit the comparative evidence

2. Agriculture first in Ethiopia: prices and linkages

3. Agricultural constraints on the agricultural transformation

1. Revisit the comparative evidence

• Perceived wisdom:

– Growth in predominantly agricultural economy has to start in agriculture

• English Story

• East-Asian miracle

• WDR 2007

Revisiting the evidence...

• England, France (history): key stimulus for agricultural productivity growth in 17th -19th century came from high urban demand;

• Vietnam, China, India: agriculture played a role but not key/sole driver of growth. In all cases strong incentives were present to increase productivity:– Vietnam: underused HYV given excellent agro-climatic (and irrigation)

potential;– China: very strong price incentives in early 1980s;– Green revolution India and other countries: HYV rice (IR8) offering 5 times

yield using standard practices and 10 times yield with irrigation/fertiliser mix; for wheat also multiple of yield on offer. Even then, it took many years to realize doubling of yields in rice and other crops.

– Against this: Philippines – new technologies in 1960s but no rise in incomes, as rice price declined and no agricultural transformation

Conclusion?

• Not quite simply ‘agriculture first’

• Technology adoption/changing practices occur not in a vacuum, but require high economic returns

– Either massively high productivity technologies/ practices

– Or sustained high prices, requiring high demand

Structure

1. Revisit the comparative evidence

2. Agriculture first in Ethiopia: prices and linkages

3. Agricultural constraints on the agricultural transformation

2. Questioning agriculture first

• Technology availability?

– Some, but not with massive returns

• E.g. Maize: 56% for improved seeds/practices/fertilizer relative to traditional practices/seeds (2001)

– Would require sustained high prices to offer high returns

2. Questioning agriculture first...

• Prices: economy-wide interactions– Ethiopia, land-locked with high transactions costs to

borders

– Implication: for wide range of prices, as if closed economy (non-tradable for wide range)

– So tricky food price balance: • not too high to stifle growth in rest of economy,

• not too low to stifle innovation and growth in agriculture

• Only limited stabilisation offered by international markets, with output increases rapidly undermining incentives (e.g. maize in 2001/02)

Figure 1: Import and export parity, and wholesale prices for wheat (Addis Ababa), January 1998 to November 2008

2. Questioning agriculture first...

• Incentives for cereal agricultural growth would require urban income growth to sustain demand for cereals.

• Can this urban income growth simply stem for higher rural incomes or higher rural production? No...= (forward) production linkages (but ?)

= low consumption linkages (marginal budget share for cereals 19%, other food 22%, ind goods 22%)

Conclusion 2• In Ethiopia:

– No ‘golden eggs’ in technology

– Requiring high incentives for productivity growth

– In turn requiring processes of urban growth

– Which agricultural growth cannot deliver

• Corroborates with other evidence:

– For African standards, very small gap between rural and urban poverty, with latter creeping closer over time.

Conclusion 2• Agriculture not first is not the same as

agriculture last:– Agricultural growth will remain essential part

• ‘Commercialisation’ essential but– Is not just supply plus markets (traders etc)

– Requires demand growth to increase and sustain demand

– Requires agricultural strategy that pays more attention to economic returns (not just yields) and the complementarity of urban economic growth.

Structure

1. Revisit the comparative evidence

2. Agriculture first in Ethiopia: prices and linkages

3. Agricultural constraints on the agricultural transformation

3.1 Inputs...

• If high productivity gains exist, it is for ‘packages’ of fertilizer, seeds, practices...

• But meanwhile

– about 40% cereal area using fertilizer but only 5% improved seeds

– Fertilizer dominating agenda

– Extension efforts not properly assessed

Fertilizer...

• In isolation from seeds, economic returns very doubtful ‘on average’ (so scope of expansion beyond 40% unlikely)

– Yield difference minimal, VC ratios for most crops not high enough

– Relatively high cost would suggest even in ‘packages’ not massive returns

• Meanwhile strongly promoted despite lack of seeds

Seeds...

Even for maize only 20% improved seed use, wheat lower

– Failure of science and adaptation: not just need for more support, but also need innovative institutional designs

– Failure of multiplication and distribution system: design failures

Extension/advisory activities

• Does it work in terms of boosting yields?

• We don’t know...

3.2 Scale of production

• Are farms too small to be efficient? Would there be gains from plot consolidation?

– No evidence (!)

• Does it mean large scale commercial farming no role?

– Not necessarily – and scope for integrating currently ‘separate’ developments (e.g. contract farming, scale economies in marketing)

3.3 Input markets

• Seeds, fertilizer, credit, transport have in common ‘tinkering’, with regulatory and access advantages for incumbents (private or parastatals)

• Argument pro: ‘they do their job reasonably well’

• Argument against is dynamic: ‘no competitive forces to encourage efficiency improvements or new entry’

• Key trick: develop contestability of these markets

3.4 Input Credit

• Input credit system (with regional state budget at collateral) dismantled

• Input credit remains highly risky for both farmer and financial institution, risking default

• Need for sustainable design of input credit system, including with systems of insurance

Conclusions

• Danger of considering agricultural growth in isolation

• Growth in agriculture constrained by

– lack of urban income growth and

– by failures in science and seed markets,

– limited returns to fertilizer,

– and likely dynamic constraints from input market structures.

3 final questions

• What about non-food/export crops?

– tradable, exportable

– Its growth can perform same role as ‘urban income growth’, unless land competition with food when it would affect urban growth

• Why not off-farm income?

• Where will urban income growth come from?