Economics of Agricultural Development: 2nd Edition (Routledge Textbooks in Environmental and...

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Economics of

Agricultural Development

Economics of Agricultural Development examines the causes severity and effects of per-sistent poverty rapid population growth and malnutrition in developing countriesIt discusses potential solutions to these problems and considers the implications ofglobalization for agriculture poverty and the environment

Areas covered in the book includebull The sustainability of the natural resource environmentbull Gender roles in relation to agriculture and resource usebull The contribution of agricultural technologiesbull The importance of agricultural and macroeconomic policies as related

to development and trade and the successes and failures of such policies

bull The implications for what might be done in the future to encourage morerapid agricultural and economic development

The globalization of goods services and capital for agriculture is fundamentalto the future of developing countries and has major implications for the fight againstpoverty and sustainability of the environment In recent years agriculture has onceagain returned to a position of centre stage as food price volatility has led countries tore-examine their development strategies

This new edition of the essential textbook in the field builds on the 2006 originaland reflects the following developments

bull The increased impact of climate changebull Issues affecting agricultural markets such as bio-fuels the rise in farm

prices and energy costsbull The move to higher valued agricultural products

This book will be essential reading for undergraduate students seeking to un-derstand the economics of agricultural development and the world food system in-cluding environmental and human consequences of agricultural development inter-national trade and capital flows

This book contains a wealth of real world case studies and is now accompaniedby a website that includes powerpoint lectures a photo bank and a large set of dis-

cussion and exam questions

George W Norton is Professor of Agricultural and Applied Economics atVirginia Polytechnic Institute and State University Blacksburg Virginia USA

Jeffrey Alwang is Professor of Agricultural and Applied Economics atVirginia Polytechnic Institute and State University Blacksburg Virginia USA

William A Masters is Professor of Agricultural Economics at PurdueUniversity West Lafayette Indiana USA

Economics of

Agricultural

DevelopmentWORLD FOOD SYSTEMS and

RESOURCE USE

SECOND EDITION

GEORGE W NORTON

JEFFREY ALWANG

Virginia Polytechnic Institute

and State University

WILLIAM A MASTERS

Purdue University

First edition published 2006Second edition 2010by Routledge2 Park Square Milton Park Abingdon Oxon OX14 4RN

Simultaneously published in the USA and Canadaby Routledge270 Madison Avenue New York NY 10016

Routledge is an imprint of the Taylor amp Francis Group an informa business

copy 2006 2010 George W Norton Jeffrey Alwang and William A Masters

All rights reserved No part of this book may be reprinted or reproduced or utilisedin any form or by any electronic mechanical or other means now known orhereafter invented including photocopying and recording or in any informationstorage or retrieval system without permission in writing from the publishers

British Library Cataloguing in Publication DataA catalogue record for this book is available from the British Library

Library of Congress Cataloging in Publication DataNorton George WEconomics of agricultural development by George W Norton Jeffrey Alwangand William A Masters mdash 2nd edp cmIncludes bibliographical references and index1 AgriculturemdashEconomic aspects I Alwang Jeffrey R II Masters William A IIITitleHD1415N67 20103381mdashdc222009043168

ISBN10 0-415-49264-5(hbk)ISBN10 0-415-49424-9(pbk)ISBN10 0-203-85275-3(ebk)

ISBN13 978-0-415-49264-5(hbk)ISBN13 978-0-415-49424-3(pbk)ISBN13 978-0-203-85275-0(ebk)

This edition published in the Taylor amp Francis e-Library 2010

To purchase your own copy of this or any of Taylor amp Francis or Routledgersquoscollection of thousands of eBooks please go to wwweBookstoretandfcouk

ISBN 0-203-85275-3 Master e-book ISBN

v

ContentsPreface vii

Part 1 Dimensions of World Food and Development Problems 1

1 mdash Introduction 32 mdash Poverty Hunger and Malnutrition 253 mdash Economics of Food Demand 474 mdash Population 69

Part 2 Development Theories and the Role of Agriculture 87

5 mdash Economic Transformation and Growth 896 mdash Development Theory and Growth Strategies 112

Part 3 Agricultural Systems and Resource Use 129

7 mdash Agriculture in Traditional Societies 1318 mdash Agricultural Systems and Their Determinants 1469 mdash Resource Use and Sustainability 16110 mdash Human Resources Family Structure and Gender Roles 185

Part 4 Getting Agriculture Moving 205

11 mdash Theories and Strategies for Agricultural Development 20712 mdash Research Extension and Education 22713 mdash Land and Labor Markets 26014 mdash Input and Credit Markets 28115 mdash Pricing Policies and Marketing Systems 301

Part 5 Agricultural Development in an Interdependent World 325

16 mdash Agriculture and International Trade 32717 mdash Trade Policies Negotiations and Agreements 34918 mdash Macroeconomic Policies and Agricultural Development 36519 mdash Capital Flows Foreign Assistance and Food Aid 39320 mdash Lessons and Perspectives 415

Glossary of Selected Terms 429Authors Cited 435Works Cited 439Subject Index 450

vi

vii

Preface

Persistent poverty rapid population growth and malnutrition in de-veloping countries are among the most serious issues facing the worldtoday Economics of Agricultural Development examines the causes se-verity and effects of these problems It identifies potential solutionsand considers the implications of globalization for agriculture povertyand the environment It identifies linkages in the world food systemand stresses how agricultural and economic situations in poor coun-tries affect industrialized nations and vice versa It focuses on the rolethat agriculture can play in improving economic and nutritional well-being and how that role might be enhanced It explores causes and im-plications of agricultural commodity price volatility

Much has been learned about the roles of technology educationinternational trade and capital flows agricultural and macroeconomicpolicies and rural infrastructure in stimulating agricultural and eco-nomic development In some cases the same factors can contribute toeconomic growth and lead to price and income instability or environ-mental risk These lessons and other issues are examined in the bookusing basic tools of economic analysis The need is stressed for improvedinformation flows to help guide institutional change in light of socialcultural and political disruptions that occur in the development pro-cess

The challenge in studying the economics of agricultural develop-ment is to build a broad view of the problem and to bring economictheory to bear on specific challenges faced by the rural sector and onmeans for utilizing agricultural surpluses to further overall economicdevelopment The goal of this book is to help students and other inter-ested practitioners gain an understanding of the agricultural develop-ment problem including the environmental and human consequencesof different development paths and the influence of international tradeand capital flows It is designed to help students develop skills that willenhance their capability to analyze world food and development prob-lems

viii

This book interprets for undergraduates the economics of devel-opment and trade including the importance of extending economictheory to account for institutions imperfect information and the will-ingness of people to exploit others and to act collectively This exten-sion provides important insights for development policy and helps ex-plain why some countries develop while others are left behind Therole of the government in promoting broad-based development is ex-plored The book also covers topics related to sustainability of the envi-ronment gender roles in relation to agriculture and resource use andthe importance of macroeconomic policies as related to developmentand trade

This new edition of the book addresses the causes and implica-tions of recent sharp commodity price increases It contains added dis-cussion of economic issues related to biofuels and climate change andhow they affect agriculture in developing countries

INTENDED AUDIENCEEconomics of Agricultural Development is designed as a comprehensivetext for the first course on the economics of world food issues and agri-cultural development The book is aimed at undergraduate studentswith the only prerequisite a course in introductory economics Studentsin undergraduate courses that address world food and agricultural de-velopment represent a wide variety of majors Economic jargon is keptto a minimum and explained where necessary and the book sequen-tially builds a base of economic concepts that are used in later chaptersto analyze specific development problems A second audience for thebook is those who work for public and private international develop-ment organizations

ORGANIZATION of the BOOKAgricultural development is important for rural welfare and for over-all economic development Part One of the book considers the manydimensions of the world food ndash income ndash population problem in both ahuman and an economic context After the severity and dimensions ofthe problem have been established Part Two examines the economictransformation experienced by countries as they develop sources ofeconomic growth and theories of economic development includingthe role of agriculture in those theories Part Three provides studentswith an overview of traditional agriculture agricultural systems andtheir determinants in developing countries with particular attention toissues such as environmental sustainability and gender roles Part Fourthen identifies agricultural development theories and the technical and

PREFACE

ix

institutional elements required for improving the agricultural sector Itstresses the need to build on and modify current agricultural develop-ment theories Finally Part Five considers the importance of the inter-national environment including trade and trade policies macroeco-nomic policies capital flows and foreign assistance including food aidThe concluding chapter integrates various development componentsaddressed in the book and discusses future prospects for agriculturaldevelopment

ACKNOWLEDGMENTSThis edition of the book has benefited from the contributions of numer-ous individuals including feedback from students in classes at VirginiaTech and Purdue We thank Laura McCann and Laurian Unnevehr forreviewing an earlier draft as well as proposed revisions The encour-agement and assistance of our colleagues at Virginia Tech and Purdueare gratefully acknowledged We especially thank Brad Mills DavidOrden Dan Taylor SK DeDatta Anya McGuirk Herb Stoevener JerryShively Sally Thompson and Wally Tyner The book has benefitedgreatly from discussions and interactions on development issues overmany years with Phil Pardey Stan Wood Paul B Siegel Terry Roe BillEaster Dan Sisler Brady Deaton Mesfin Bezuneh and numerous gradu-ate students

We thank Robert Langham and other editors at Routledge Pressfor their assistance and we especially want to thank Mary Holliman ofPocahontas Press in Blacksburg Virginia for her invaluable editorialand production assistance We also thank Daren McGarry SteveAultman Jessica Bayer Jacob Ricker-Gilbert and Adam Sparger withassistance on figures and illustrations

George NortonJeffrey Alwang

Will Masters

PREFACE

PART 1

Dimensions of World Food

and Development Problems

Rural family in Colombia

2

PART 1 ndash DIMENSIONS OF WORLD FOOD AND DEVELOPMENT PROBLEMS

3

CHAPTER 1

IntroductionMost hunger is caused by a failure to gain access to the locallyavailable food or to the means to produce food directly

mdash C Peter Timmer Walter P Falcon and Scott R Pearson1

This Chapter1 Examines the basic dimensions of the world food situation2 Discusses the meaning of economic development3 Considers changes that occur during agricultural and economic

development

OVERVIEW of the WORLD FOOD PROBLEMOne of the most urgent needs in the world today is to reduce the perva-sive problems of hunger and poverty in developing countries Despitemany efforts and some successes millions of people remain ill-fedpoorly housed under-employed and afflicted by a variety of illnessesThese people regularly suffer the pain of watching loved ones die pre-maturely often from preventable causes In many countries the natu-ral resource base is also being degraded with potentially serious impli-cations for the livelihoods of future generations

Why do these problems persist how severe are they and what aretheir causes What does the globalization of goods services and capi-tal mean for agriculture poverty and environment around the worldAnd how does the situation in poor countries feed back on industrial-ized nations and vice versa An understanding of the fundamentalcauses of the many problems in poorer countries is essential if solu-tions are to be recognized and implemented What role does agricul-ture play and how might it be enhanced What can rich countries do tohelp How do the policies in developed countries affect developing

1 C Peter Timmer Walter P Falcon and Scott R Pearson Food Policy Analysis (Balti-more Johns Hopkins University Press 1983) p 7

4


countries These are some of the questions addressed in this book Glo-balization will continue and a key issue is how to manage it to thebetterment of developing and developed countries alike

Much has been learned over the past several years about the rolesof technology education international trade and capital flows agri-cultural and macroeconomic policies and rural infrastructure in stimu-lating agricultural and economic development In some cases these samefactors can be a two-edged sword they contribute to economic growthon the one hand but lead to price and income instability or environ-mental risk on the other These lessons and other potential solutions todevelopment problems are examined herein from an economic perspec-tive The need is stressed for improved information flows to help guideinstitutional change in light of social cultural and political disruptionsthat occur in the development process

World Food and Income SituationAre people hungry because the world does not produce enough foodNo In the aggregate the world produces a surplus of food If the worldrsquosfood supply were evenly divided among the worldrsquos population eachperson would receive substantially more than the minimum amount ofnutrients required for survival The world is not on the brink of starva-tion Population has roughly doubled over the past 40 years and foodproduction has grown even faster

If total food supplies are plentiful why do people die every dayfrom hunger-related causes At its most basic level hunger is a povertyproblem Only the poor go hungry They go hungry because they can-not afford food or cannot produce enough of it themselves The verypoorest groups tend to include families of the unemployed or under-employed landless laborers the elderly handicapped and orphans andpersons experiencing temporary misfortune due to weather agricul-tural pests or political upheaval Thus hunger is for some people achronic problem and for others a periodic or temporary problem Manyof the poorest live in rural areas

Hunger is an individual problem related to the distribution of foodand income within countries and a national and international problemrelated to the geographic distribution of food income and populationRoughly one-fifth of the worldrsquos population (about one billion people)lives on less than $1 per day (about one-half lives on less than $2 perday) These people are found primarily in Asia and Africa The largestnumber of poor and hungry live in Asia although severe hunger andpoverty are found in Sub-Saharan Africa and in parts of Latin AmericaGood strides have been made in reducing global poverty over the

5

Many farm workers in Asia earn between one and two dollarsper workday

CHAPTER 1 ndash INTRODUCTION

past 30 years the proportion of the worldrsquos population living on lessthan $1 per day has been cut by more than half and is now less than 20percent However more remains to be done to alleviate poverty-relatedproblems

While hunger and poverty are found in every region of the worldSub-Saharan Africa is the only major region where per-capita food pro-duction has failed to at least trend upward for the past 30 years AsFigure 1-1 shows per capita food production in Africa has stagnatedsince 1980 and had experienced a downward trend for several yearsbefore that time Latin America and particularly Asia have experiencedrelatively steady increases The result has been significant progress inreducing hunger and poverty in the latter two regions while per-capitacalorie availability remains below minimum nutritional standards inmany Sub-Saharan countries Low agricultural productivity (farm out-put divided by farm inputs) wide variations in yields due to naturaleconomic and political causes and rapid population growth have com-bined to create a precarious food situation in these countries

Annual variation in food production is a serious problem particu-larly in Sub-Saharan Africa (see Figure 1-1) This variation has causedperiodic famines in individual countries particularly when productionproblems have been compounded by political upheaval or wars that

6

Figure 1-1 Index of per capita food production(Source FAOSTAT data 2005)


have hindered international relief efforts Production variability causeswide price swings that reduce food security for millions who are on themargin of being able to purchase food If the world is to eliminatehunger it must distinguish among solutions needed for short-termfamine relief those needed to reduce commodity price instability (orits effects) and those needed to reduce long-term or chronic povertyproblems

Food PricesFor many years for most people in the world the real price of food fellrelative to the prices of other things The international prices (in nomi-nal or ldquocurrentrdquo dollars) of maize rice and wheat mdash the worldrsquos majorfood grains mdash are shown in Figure 1-2 Despite peaks in 1974 19811996 and 2008 the average prices of all three grains have fluctuatedwithout strong trends for several years The prices of most other thingshave risen much more steadily with inflation so for most people therelative (or ldquoconstantrdquo) price of food has slightly fallen with exceptionsduring the peak years This reduction in the real price of food is bothgood and bad because prices affect economic growth and social wel-fare in a contradictory fashion Lower food prices benefit consumersand stimulate industrial growth but can lower agricultural producer

7


incomes and reduce employment of landless workers To the extentthat lower prices reflect lower production costs impacts on producersmay be mitigated Future food-price trends will depend on the relativeimportance of demand shifts resulting primarily from changes in popu-lation income and non-food uses for farm products (such as bio-fuels)compared to supply shifts resulting from a variety of forces particu-larly new technologies and climate changes

Instability in local and world food prices however is a seriousproblem affecting food security and hunger in developing countriesThe three grains shown in Figure 1-2 have exhibited sizable year-to-year price variations This instability was most severe during the 1970sand most recently Food price fluctuations directly affect the well beingof the poor who spend a high proportion of their income on food Gov-ernments are finding that food price instability increases human suf-fering and also threatens political stability

As shown in Figure 1-2 grain prices were higher than normalin 2007ndash2008 The higher prices were due to a combination of factorsthat shifted supply and demand as well as actions by market specula-tors Supply factors included such items as adverse weather conditions

Figure 1-2 World prices of major grains in current dollars (Source FAOSTAT2009 for years through 2006 and IMF International Financial Statistics 2009 foryears 2007ndash09)

8


and higher fuel and fertilizer costs while demand factors included itemssuch as increased demand for grains for bio-fuel use continued popu-lation and income growth in many developing countries changes incurrency values and policy changes in countries that increased theirdemand for imported food Also speculative investments in commod-ity markets increased driving up commodity prices more than basicsupply and demand factors alone would have dictated As the globaleconomy turned down in 2008 speculators eventually reduced theseinvestments fuel prices dropped and income growth slowed Grainsupplies also increased and food prices retreated substantially fromtheir highs of early 2008

MalnutritionHunger is most visible to people in developed countries when a droughtor other disaster results in images in the news of children with bloatedbellies and bony limbs enduring the pain of extreme hunger Disturb-ing as such images are in a sense they mislead The less conspicuousbut more pernicious problem in terms of people suffering and dyingis chronic malnutrition While accurate figures of the number of mal-nourished in the world are not available and even good estimates de-pend on the definition used a conservative estimate is that roughly 860million people suffer from chronic or severe malnutrition associatedwith food deprivation More than ten million people many of themyoung children die each year from causes related to inadequate foodconsumption Increasing per-capita food production has allowed moreof the worldrsquos population to eat better But for those in the lower in-come groups the situation remains difficult

HealthPeople born in developing countries live on average 14 years less (inSub-Saharan Africa 27 years less) than those born in developed coun-tries Health problems often associated with poverty are responsiblefor most of the differences in life expectancies Mortality rates for chil-dren under age five are particularly high often 10ndash20 times higher thanin developed countries (see Figure 1-3) Though countries with highrates of infant mortality are found in all regions Sub-Saharan Africancountries are particularly afflicted The band of high infant mortalitystretching from the Atlantic coast across Africa to Somalia on the In-dian Ocean covers some of the poorest and most undernourished popu-lations in the world

9

Fiig

ure

1-3

U

nd

er-

five

mo

rta

lity r

ate

s (

pe

r 1

00

0 li

ve

bir

ths)

(S

ou

rce

Wo

rld

He

alth

Org

an

iza

tio

n S

tatistica

l In

form

atio

n S

yste

m

20

06

)


10

Poverty affects health by limiting peoplersquos ability to purchase foodhousing medical services and even soap and water Inadequate publicsanitation and high prevalence of communicable diseases are also closelylinked with poverty A major health problem particularly among chil-dren is diarrhea usually caused by poor water quality According tothe World Bank 5 to 10 million children die each year from causes re-lated to diarrhea Respiratory diseases account for an additional 4 to 5million deaths and malaria another million Basic health services arealmost totally lacking in many areas on average ten times as manypeople per doctor and per nurse are found in low-income countries asin developed countries

A major health problem that continues to grow rapidly in the de-veloping world is acquired auto-immune deficiency syndrome (AIDS)The disease is particularly difficult to contain in many African coun-tries because of the ease of its heterosexual spread lack of educationabout the disease limited use of protective birth-control devices andin some cases absence of government commitment to address the prob-lem Estimates are that roughly a quarter of the adult populations incertain countries such as Botswana and Swaziland are HIV positiveEffects are felt in lost productivity and increased poverty in additionto its effects on direct human suffering As serious as the problem cur-rently is in Africa the region likely to be devastated most by AIDS inthe future is Asia According to the World Health Organization an es-timated 33 million people worldwide were living with HIVAIDS in2007

Population GrowthHow important is population growth to the food-poverty-populationproblem It is very important and will continue to be so at least for thenext 40ndash50 years Population is growing less than 1 percent per year indeveloped economies but 2 percent per year in developing countriesexcluding China and 3 percent or more in many Sub-Saharan African countries These higher growth rates place pressureon available food supplies and on the environment in many low-in-come countries Population growth and food production are closelylinked and changing either in a major way takes time as discussed inChapter 4 It is clear that continual increases in food production areneeded because regardless of how successful are efforts to control popu-lation growth world population will not stabilize for many years Rapidurbanization is also occurring as populations continue to grow


11


Children in Honduras

GlobalizationFood and economic systems in less-developed countries are affectedby the international economic environment far more today than theywere in years past Trade and other economic policies abroad and athome international capital flows migration and oil price shocks havecombined to increase the instability of and opportunities for improv-ing the food and economic security of developing countries

International trade in agricultural products (as with other prod-ucts) has grown rapidly since the 1970s building on improvements intransportation and information systems As exports and imports of farmproducts constitute a higher proportion of agricultural production andconsumption effects of domestic agricultural policies aimed at influ-encing the agricultural sector are altered World prices become moreimportant to farmers than they were previously and possibilities formaintaining a nationrsquos food security at the aggregate level are improvedalthough price volatility remains an issue Production and policychanges abroad also tend to have a great effect on domestic agricultureas international trade grows While the need for national food produc-tion self-sufficiency has been reduced the need to be price competitivewith other countries has grown as has the need to participate in inter-national negotiations to alter the policy environment

International capital (money) markets through which currenciesflow from country to country in response to differences in interest ratesand other factors have become as important as trade to the food and

12


economic systems in less-developed countries The volume of interna-tional financial transactions far exceeds the international flows of goodsand services Capital flows affect the values of national currencies inforeign exchange markets The foreign exchange rate or the value ofone countryrsquos currency in terms of another countryrsquos currency is animportant determinant of the price a nation receives for exports or paysfor imports Speculation in financial markets has led to rapid inflowsand outflows of capital in some countries resulting sharp changes inasset values and incomes

Many less-developed countries also have serious foreign debt prob-lems Many countries have reduced their rate of government spendingin efforts to service this debt and this decrease in turn has lowered theavailability of pubic services creating further hardships for the poorThe need for foreign exchange to repay external debts has also increasedthe importance of exports for less-developed countries forcing somecountries to reexamine their trade and exchange-rate policies At thesame time new technologies have been changing the possibilities thatcountries have for producing and trading particular products

Environmental DegradationAs populations grow environmental problems become more severeDeforestation farming of marginal lands overgrazing and misuse ofpesticides have contributed to soil erosion desertification poisoningof water supplies and climate change The global climate has becomegradually warmer and less stable while water has become scarcer En-vironmental problems exist in every region of the world Some degra-dation is intentional but most is the unintended result of people andgovernments seeking means of solving immediate food and economiccrises often at the cost of long-term damage to the environment Someof this damage may compromise the ability of a country to raise in-comes in the long run When people are hungry it is hard to tell themto save their resources for the future and environmental conservationrepresents a form of savings However many potential solutions existthat are consistent with both short-term increases in food productionand long-term goals of simultaneously sustaining or improving envi-ronmental quality while raising incomes

Risk and UncertaintyMost of the factors mentioned above are associated with increased ex-posure to risk and uncertainty Fluctuating prices exchange rate in-stability certain crop pests and rapidly changing weather patterns

13


Slum close to riverbank in Katmandu Nepal

represent risk factors Recent research has shown that risks and riskmanagement imply real costs that may compromise long-run improve-ments in well being Risk also lowers welfare in the short run For ex-ample Hurricane Mitch struck the Central American coastal regionduring October 1998 causing massive losses in productive capacity andwashing out roads houses and entire villages In Honduras alone itkilled more than 8000 people and injured more than 12000 Deforesta-tion in hillside areas contributed to the hurricanersquos damage as land-slides and flooding washed out low-lying areas In December 2004 alarge earthquake off the coast of Indonesia caused a tsunami that washedashore in several countries especially in Indonesia Sri Lanka Indiaand Thailand killing more than 228000 people

Risk is not necessarily bad Innovation and entrepreneurship arerisky It is the way that risks are managed that most influences eco-nomic growth Risk management needs to be conducted in an efficientmanner the proper balance must be found between managing risksand pursuing other goals

The preceding overview provides brief highlights of some of thedimensions of the food-income-population problem These and otherproblems are discussed in more depth in subsequent chapters and al-ternative solutions are suggested First however it is important to con-sider what we mean when we talk about development

14


MEANING of DEVELOPMENTThe term development means a change over time typically involvinggrowth or expansion Economic development involves changes inpeoplersquos standard of living For most of human history there was littlesuch change but over the past 300 years there has been a rapid and (sofar) sustained increase in almost every kind of human activity Growthoccurred first and has been sustained the longest in Northwest Europeand North America but similar kinds of expansion have occurred allaround the world

Development is a process with many economic and social dimen-sions For most observers successful economic development requiresas a minimum rising per-capita incomes eradication of absolute pov-erty and reduction in inequality over the long term The process is adynamic one including not only changes in the structure and level ofeconomic activity but also increased opportunities for individual choiceand for improved self-esteem

Development is often a painful process Adjusting to new circum-stances is always difficult as Mark Twain famously wrote ldquoIrsquom all forprogress mdash itrsquos change I canrsquot standrdquo There is often dramatic socialupheaval with traditional ways of life being displaced existing socialnorms being challenged and increasing pressures for institutional andpolitical reform The physical and cultural landscape of a country canchange radically during economic development And at the individuallevel the standard of living for the poorest people in a society doessometimes decline even as average real incomes increase More oftenthe fruits of improvement are unequally distributed By any measurepoverty and deprivation remain widespread despite the astonishingimprovements in living standards experienced by many all across theglobe

As economic activity continues to expand there is continuous con-cern with the constraints imposed by natural resources and environ-mental factors The World Commission on Environment and Develop-ment has defined sustainable development as ldquodevelopment that meetsthe needs of the present without compromising the ability of futuregenerations to meet their own needsrdquo2 Thus the term ldquodevelopmentrdquoencompasses not only an economic growth component but distri-butional components both for the current population and for futuregenerations

2 World Commission on Environment and Development Our Common Future (NewYork Oxford University Press 1987) p 43

15


Measures of DevelopmentAlthough development is difficult to measure it is often necessary todo so in order to assess the impacts of particular programs to establishcriteria for foreign assistance and for other purposes Because of itsseveral dimensions single indicators of development can be mislead-ing Measures are needed that are consistent with the objective of rais-ing the standard of living broadly across the population Average per-capita income is frequently used as a measure (see Figure 1-4) Is it agood measure

Average per capita income is not a perfect measure of living stan-dards for several reasons but finding an alternative indicator that canincorporate each dimension of development is impossible Because de-velopment is multidimensional collapsing it into a single index mea-sure requires placing weights on different dimensions Average per-capita income is an inadequate measure even of the economic dimen-sions because it misses the important distributional elements of devel-opment and is a crude measure of peoplersquos well-being

Alternative multidimensional development indicators have beensuggested One of the oldest is a level-of-living index proposed by MKBennett that weights 19 indicators for which data were available in 19513

Examples of indicators include caloric intake per capita infant mortal-ity rates number of physicians per 1000 of total population and yearsof schooling A more recent index is the Human Development Index4

(HDI) which weights life expectancy education and income Weight-ing schemes are subjective however and average per-capita income ishighly correlated with many of the indicators Consequently averageper-capita income measured as gross national product (GNP) or grossdomestic product (GDP) per capita is often employed as a first approxi-mation then measures such as income distribution literacy rates lifeexpectancy and child mortality are examined separately or as part ofan index Even these supplementary indicators can be misleading dueto regional disparities within countries

Some studies have called for the GNP income measure itself to bemodified to account for depreciation or appreciation of natural resource-based assets particularly forests This modification may be possibleonce natural resource accounting procedures are further refined

3 See M K Bennett ldquoInternational Disposition in Consumption Levelsrdquo American Eco-nomic Review vol 41 September 1951 pp 632ndash49

4 United Nations Development Program Human Development Report (New YorkPalgrave Macmillan 2007) p 356

16


Fig

ure

1-4

G

NI p

er

ca

pita

2

00

4 (

Atla

s M

eth

od

)(S

ou

rce

Wo

rld

Ba

nk

Wo

rld

De

ve

lop

me

nt

Ind

ica

tors

On

line

Da

tab

ase

)

17


Incomes and DevelopmentPoverty and low incomes are most frequently associated with under-development while growing per-capita incomes should indicate increas-ing levels of development As discussed above increasing average in-comes may not necessarily mean more development because the dis-tribution of this income often determines whether poverty and inequal-ity are diminished as the mean grows Some of the relationships betweenpoverty and inequality are discussed in Box 1-1

Numerous measures of inequality and the extent of poverty existFor example the Human Poverty Index (HPI) measures the extent ofdeprivation with respect to life expectancy education and income5 Ifas is argued above the meaning of development contains some ele-ment of poverty reduction or increased equality of income distribu-tion then clearly the incomes of the poor and destitute should be raisedduring the development process

Policies undertaken to promote development have diverse effectson the incomes of the poor Some people benefit but often some do not

5 United Nations Development Program Human Development Report (New YorkPalgrave Macmillan Press 2007) p 357

BOX 1-1

POVERTY and INEQUALITYPoverty is generally defined as the failure to achieve certain minimum stan-dards of living By its very nature poverty refers not just to averages but todistributions Poverty is not however synonymous with inequality coun-tries with perfect equality could contain all rich or all poor people Measure-ment of poverty requires three steps determining an appropriate measureor indicator deciding on its minimum level and counting the number orpercentage of people falling below it Alternatively a measure of degree orintensity of poverty would indicate the amount by which people fall belowthe poverty line

While poverty refers to some level or position with respect to a mea-sure such as income inequality refers to the distribution of that measureamong a population For example evidence from 21 developing countriesindicates that on average 6 percent of household income is received bythe poorest 20 percent of the households whereas 48 percent of house-hold income is received by the richest 20 percent In some countries theextremes are even more dramatic It is possible for poverty to decrease ina country during the development process but for inequality to increase atleast for a period of time

18


and at times incomes fall for certain population groups It is impor-tant to consider the winners and losers in the development processIncome distributions and changes in them are indicators of the impactof development policies on different groups in society

Values and DevelopmentValue judgments or premises about what is or is not desirable are inex-tricably related to development economics Concerns for economic andsocial equality poverty eradication and the need to improve healthand education all derive from subjective beliefs about what is good andwhat is not Solutions to specific problems often involve tradeoffsand decisions about public resource allocations always involvetradeoffs Governments make such tradeoffs every day as most gov-ernment actions are costly to some people even as they benefit othersEconomics can be a powerful tool for evaluating these tradeoffs pro-viding insights into the costs and benefits of different actions winnersand losers and longer-run consequences of savings investment andconsumption decisions Economics is however less well-suited formaking value decisions

Even if people share the same set of beliefs and values they mayattach different weights to the individual beliefs and values within thatset Because there is no correct set of weights people may not agreeabout appropriate solutions to development problems even if the sug-gested solutions appear conceptually sound in terms of leading to theirintended impacts

Most policy suggestions would result in both gainers and los-ers In some cases the gainers could compensate the losers but some-times they could not and often they do not Because affected groupshave differing political strengths within society economic and so-cial development policies cannot be separated from the political pro-cess These realities must be considered if development policies areto succeed

ROLE of AGRICULTUREMany alternative development paths or strategies exist The strategyfollowed by an individual country at a particular point in time is or atleast should be influenced in part by its resource endowments and stageof development Some countries with vast oil and mineral resourceshave generated capital for development by exporting those resourcesOthers have emphasized cash-crop exports such as coffee cocoa andtea Some have focused on industrial exports while others have stressedincreases in basic food production The optimal development path will

19


vary from country to country but the choice of an inappropriate pathgiven the existing resource endowments and stage of development canresult in long-term stagnation of the economy

Numerous examples can be found of countries choosing the wrongdevelopment path and paying the price Argentina a country well-en-dowed with land resources pursued government policies in the 1940sand 1950s that stressed industrialization and virtually ignored agricul-ture The result was that agricultural exports previously an importantcomponent of economic growth stagnated in the 1950s and foreignexchange shortages prevented the imports of capital goods needed forindustrialization Economic growth slowed dramatically as a result In-dia is another country whose potential for agriculture-driven growthwas subverted by a disproportionate emphasis on industrialization inthe 1950s and 1960s

Agriculture is not very productive in most low-income countriesEarly in the development process much of the population is employedin agriculture and a high percentage of the national income is derivedfrom that sector6 (see Table 1-1) As development proceeds populationgrows and per-capita income increases As incomes grow more food isdemanded either agricultural production or imports must increaseBecause agriculture commands so many of the resources in most low-income countries few funds are available for importing food or any-thing else unless agricultural output grows

The capacity of the agricultural sector to employ an expandinglabor force is limited As incomes continue to rise the demand for non-food commodities grows as well Therefore economic development re-quires a structural transformation of the economy involving relativeexpansion of nonagricultural sectors The agricultural sector must con-tribute food labor and capital to that expansion It also provides amarket for nonagricultural goods

This economic transformation is illustrated in Table 1-1 Agricul-ture accounts for a large percentage of total income and an even largerpercentage of total employment for the lower-income countries Thecontribution of agriculture to national incomes declines from 30 to 50percent for the lower-income countries to 15 to 20 percent for the

6A warning about measurement is appropriate in most countries it is difficult to mea-sure the number of people employed in agriculture Multiple job holdings sea-sonal labor use in agriculture and unpaid household labor all complicate the mea-surement problem Often data on the number employed in agriculture are obtainedby (generally high-quality) census estimates of the rural population Even in ruralareas many people are employed outside agriculture

20


Table 1-1 Relationship among Per-Capita National Income the

Proportion of National Income in Agriculture and the Proportion

of the Labor Force in Agriculture Selected Countries 2006

Country Per capita Agriculture GDP Percentage of income as a percentage active labor force(in PPP dollars)1 of total GDP in agriculture

Male Female

Ethiopia 581 47 84 76Uganda 848 32 60 77Mali 1004 37 50 30Bangladesh 1068 20 50 59Moldova 2190 18 41 40

Philippines 2956 14 45 25Indonesia 3209 13 43 41Colombia 5867 12 32 8Ecuador 6737 7 11 4Thailand 7061 11 44 41

Brazil 8474 5 25 16Argentina 10815 8 2 1Mexico 11387 4 21 5South Korea 21273 3 7 9Italy 27750 2 5 3

Greece 29261 3 12 14

Japan 30290 2 4 5France 30591 2 5 2Australia 34160 3 5 3Canada 34972 2 4 2United States 41812 2 2 1

Source World Bank World Development Indicators 20081 PPP stands for purchasing power parity and means that the incomes are con-

verted to dollars taking into account cost-of-living differences between thecountries

middle-income range and down to 5 percent or below for the highestincome countries

The initial size and low productivity of agriculture in most de-veloping countries suggests an opportunity for raising national in-come through agricultural development Because of the initial sizeof and low per-capita income in the agricultural sector there is realscope for improving the distribution of income and enhancing thewelfare of a major segment of the population through agriculturaldevelopment

21

CHAPTER 1 mdash INTRODUCTION

One of the keys to agricultural development is to improve infor-mation flows In primitive societies economic activities are local andinformation is basically available to all Inappropriate activities are con-strained by social and cultural norms As development begins to pro-ceed and economies become more complex information needs increasebut traditional forms of information transmission are incapable of meet-ing these needs Modern information systems are slow to develop cre-ating inequalities in access to new information Those with greater ac-cess than others can take advantage of this situation to further theirown welfare often at the expense of overall agricultural and economicdevelopment

Some changes required to foster broad-based and sustainable de-velopment require institutional changes and capital investments Capi-tal investments necessitate savings Such savings are channeled intoprivate and public investment the latter to build the infrastructureneeded for development Saving requires striking a balance betweenpresent and future levels of living because it requires abstention fromcurrent consumption Means must be sought to reduce this potentialshort-run versus long-run conflict during the development processHowever certain types of investments necessary for development suchas education provide both short- and long-run benefits as do invest-ments in technologies and employment-intensive industries

Improving AgricultureHow can agriculture be improved to facilitate its role in providing foodand contributing to overall development There are still areas of theworld particularly in parts of Latin America and Africa where landsuited for agricultural production is not being farmed Most increasesin agricultural production will have to come however from more in-tensive use of land currently being farmed Such intensive use will re-quire improved technologies generated through research as well asimproved irrigation systems roads market infrastructure and otherinvestments It will require education and incentives created throughchanges in institutions such as land tenure systems input and creditpolicies and pricing policies (see Box 1-2)

Agriculture and Employment InteractionsAgricultural development can provide food labor and capital to sup-port increased employment in industry and can stimulate demand inrural areas for employment-intensive consumer goods Because of theircomparative advantage in labor-intensive production many develop-ing countries will need to import capital-intensive goods such as steel

22


BOX 1-2

HISTORICAL PERSPECTIVE on AGRICULTURAL

DEVELOPMENTThe historical progression of agricultural development can be broadly bro-ken into four distinct periods marked by three ldquorevolutionsrdquo in productiontechnology and social institutions

First from the time that we first appeared on earth human beingshunted and gathered their food Hunter-gatherer societies typically lived insmall groups experienced little population growth

Then more than 10000 years ago a combination of climate changesand other factors created conditions for the development of settled agricul-ture In the Middle East and elsewhere people began to collect and culti-vate the seeds of plants that eventually became modern barley wheatand rye This development is known as the first agricultural revolution andpermitted a slow but significant increase in human population density

More recently a few hundred years ago rising population density andopportunities for trade led to a second agricultural revolution In North-western Europe and elsewhere farmers developed crop rotations and live-stock management systems that permitted rapid growth in output per per-son fueling the industrial revolution and the eventual mechanization ofmany important tasks

Finally in the late nineteenth and early twentieth centuries scientificbreeding chemical fertilizer and other innovations allowed rapid increasesin output per unit of area The spread of these biological technologies todeveloping countries known as the green revolution has been a powerfulengine of economic growth and poverty alleviation allowing low-incomepeople to produce more food at lower cost than ever before

These historical trends played out at different speeds and in differentways across the globe A few people in the poorest countries still devotesubstantial energy to hunter-gatherer activities and many millions of farm-ers still cultivate the same seeds in the same ways as their ancestorsBecause of population growth these techniques and institutional arrange-ments yield less and less output over time The development and spreadof higher-productivity systems to suit these peoplersquos needs is among themajor humanitarian challenges of our time

and fertilizer and export labor-intensive consumer goods and certaintypes of agricultural goods Countries that do not match an employ-ment-oriented industrial policy with their agricultural developmentpolicy will fail to realize the potential income and employment benefitsof agricultural development

23


SUMMARYSome of the basic dimensions of the world food-poverty-populationproblem were examined The aggregate world food situation was re-viewed and questions such as who the hungry are and why they arehungry even though the world produces a surplus of food were ad-dressed The significance of population growth and a series of forces inthe global economy that influence developing countries were stressed

The meaning and measures of development were discussed andimportance of development problems The desirability of suggestedsolutions depends on value judgments While alternative developmentstrategies can be followed agriculture has an important role to play inoverall development in most developing countries Development willrequire a complex set of improved technologies education and insti-tutions and an employment-oriented industrial policy

IMPORTANT TERMS and CONCEPTSAgricultural productivity InstitutionsDevelopment International capital marketsEnhanced information flows International tradeEnvironmental degradation Measures of developmentFood-poverty-population problem Population growthFood price instability Structural transformationForeign exchange rates of the economyGlobalization SustainabilityHealth problems Technology

Looking AheadIn order to visualize more clearly the relationships among food sup-plies food demand population growth and nutrition it is importantto examine facts scientific opinion and economic theory We make thisexamination in the remaining chapters of Part One in this book Weturn first in Chapter 2 to the causes and potential solutions to hungerand malnutrition problems

QUESTIONS for DISCUSSION1 Are people hungry because the world does not produce enough

food2 Has food production in developing countries kept pace with

population growth there3 Is malnutrition more widespread today than in the past4 Why did food prices rise so dramatically in 2008

24


5 What are some factors that will influence the price of food over thenext 10 to 20 years

6 Is there any hope of bringing more land into production to helpincrease food production

7 Why is agricultural development particularly important in less-developed countries

8 Approximately what proportion of the worldrsquos population lives onper-capita incomes of less than $2 per day

9 What is development To what extent are values important whendiscussing development issues

10 Is average per-capita income a good measure of level of living11 Why is most of the labor force engaged in agriculture in many

less-developed countries12 Does economic development require expansion of the nonagricul-

tural sector in low-income countries13 What is the conflict between increasing near- versus long-term

levels of living in developing countries14 What are the major health problems in developing countries and

what are their primary causes15 How fast is population growing in developing countries16 Why has international agricultural trade become more important

over the past 30 years17 Why have international capital markets become more important

to developing countries over the past 30 years18 Why might low food prices be both good and bad19 Why has environmental degradation become an increasing prob-

lem in developing countries

RECOMMENDED READINGSEicher Carl K and John M Staatz International Agricultural Development

(Baltimore Johns Hopkins University Press 1998) especially pp 3ndash53Food and Agriculture Organization of the United Nations State of Food

and Agriculture 2008 (Rome FAO 2008) (and various other years)Runge C Ford Benjamin Senauer Philip G Pardey and Mark W

Rosegrant Ending Hunger in Our Lifetime Food Security and Globaliza-tion (Baltimore Johns Hopkins University Press 2003)

Todaro Michael P Economic Development (New York Addison Wesley2008) especially Chapters 1 2 and 3

United Nations Development Programme Human Development Report20072008 (New York Palgrave Macmillan 2007)

World Bank World Development Report 2008 (New York Oxford UniversityPress) see earlier volumes as well

25

For hunger is a curious thing at first it is with you all the time wak-ing and sleeping and in your dreams and your belly cries out insis-tently and there is a gnawing and a pain as if your very vitals werebeing devoured and you must stop it at any cost and you buy amomentrsquos respite even while you know and fear the sequel Thenthe pain is no longer sharp but dull and this too is with you alwaysso that you think of food many times a day and each time a terriblesickness assails you and because you know this you try to avoidthe thought but you cannot it is with you Then that too is gone allpain all desire only a great emptiness is left like the sky like a wellin drought and it is now that the strength drains from your limbsand you try to rise and find that you cannot or to swallow water andyour throat is powerless and both the swallow and the effort of re-taining the liquid taxes you to the uttermost

mdash Kamala Markandaya1

This Chapter1 Describes the world food situation2 Examines different forms of poverty hunger and malnutrition

their magnitudes and consequences and how they are measured3 Identifies principal causes of and potential solutions to problems

with poverty hunger and malnutrition in developing countries

THE WORLD FOOD SITUATION

World Food Demand and SupplyWorld food consumption and production have each grown about 22percent per annum since 1970 while in developing countries consump-tion has grown about 37 percent and production 35 percent Cereals

CHAPTER 2

Poverty Hunger and

Malnutrition

1 Kamala Markandaya Nectar in a Sieve (New York New American Library 1954) p 91

26

are the most important sources of food and since the mid-1960s worldcereal production has risen by roughly one billion tons per year It islikely that an additional billion tons in production per year will beneeded by 2030 to meet food needs of a world population expanding innumbers and in income It is also likely that cereal imports by develop-ing countries will increase from about 10 percent of consumption toabout 15 percent

While the overall numbers and projections suggest gradual im-provement in reducing malnutrition in the world there are still severalcountries in which per-capita food consumption has declined and isnot likely to increase enough to significantly reduce the number of un-dernourished Even in countries with growing average food consump-tion some groups may not see their consumption levels increase house-hold food consumption is closely related to household incomes andthe most disadvantaged are afflicted by low and uncertain levels ofincome In addition the rate of growth in agricultural output for theworld as a whole has slowed since the 1980s and the use of cereals andsugar to produce bio-fuel products has created competition for theseproducts for food When food supplies are short prices rise creatingsevere problems for those who spend a high proportion of their limitedincome on food The effects of the food price increase in 2007ndash2008 area good example as they are estimated to have caused an increase in thenumber of people malnourished in the world from 800 million to 860million A best-case scenario for the world over the next 30 years wouldseem to point to a reduction in severely malnourished to about 400ndash500million people but for populations in many countries the struggle forfood will continue Therefore we turn now to how poverty and accessto food manifest themselves in terms of hunger malnutrition and insome cases famine

POVERTYPoverty has many faces and is one of the major challenges facing thedevelopment community Poverty is widely understood to be an in-ability to meet basic needs and the poor tend to be hungry are withoutadequate shelter and have limited access to health care The poor lackopportunity and their powerlessness often lead to hopelessness anddespair To most people reading this book poverty is an invisible andabstract problem somewhere out there We seldom think about it andwhen we do we often donrsquot know what to think or how to take actionagainst it Trends since the early 1980s point to a decrease in globalpoverty but stark challenges remain in 2005 an estimated 14 billion


27

people mdash about one fourth of the worldrsquos population mdash lived inextreme poverty and efforts to reduce poverty must be constantlyrefined

Measuring PovertySince poverty is multidimensional efforts to measure it can be compli-cated by attention to its different dimensions Two broad types of mea-surement schemes exist monetary and non-monetary Monetary mea-sures consolidate the different dimensions into a single unit of measuremdash money Their strengths include the ability to make comparisons in acommon unit a non-arbitrary measurement scheme and ability to quan-tify the extent depth and severity of poverty (see box 2-1) Howevermonetary approaches often fail to capture dimensions of poverty thatmay be especially important and intractable such as social exclusionand political powerlessness

Non-monetary measures include qualitative assessments and in-dices that combine different dimensions such as the Human Develop-ment Index (HDI) and Human Poverty Index (HPI) described in Chap-ter 1 These indices often face the criticism that the weights used arearbitrary and measures vary significantly when the weights are changed

The different approaches complement each other and their com-bination has allowed a deeper understanding of poverty For exampleparticipatory poverty assessments that engage in discussions withgroups of poor people about their conditions and the unique challengesthey face often accompany monetary assessments and the combina-tion can help in understanding how policies can be formulated to re-duce poverty

Vulnerability Transitory and Chronic PovertyPoverty is not a constant state for many developing-country householdsWeather pests diseases and policies cause fluctuations in income thattranslate into movement in and out of poverty mdash households are vul-nerable to becoming poor This in-and-out-of poverty situation is im-portant because separate policies may be needed to address transitorycompared to chronic poverty Evidence shows that transitory povertymdash households who move in and out of poverty over time mdash accountsfor a substantial portion of overall poverty As a result means of pro-tecting people from transitory income shortfalls may substantially im-prove the global poverty picture Formal and informal insuranceschemes social safety nets and other means of reducing or managingrisks can help achieve this aim Rural public work programs mdash such as

CHAPTER 2 mdash POVERTY HUNGER AND MALNUTRITION

28

BOX 2-1

MONETARY MEASUREMENT of POVERTY1

Three primary challenges in measuring poverty are (i) deciding what tomeasure (ii) identifying a value below which a household is deemed to bepoor and (iii) adding it up for the population Poverty involves an inability tocontrol sufficient resources to meet a minimum level of well being andanalysts use household income or consumption expenditure to measure itConsumption is generally preferred because income particularly in ruralareas is seasonal and variable while consumption is smoother and ofteneasier to measure The poverty line is the value of income or expenditureson a daily monthly or annual basis below which a person is deemed to bepoor This poverty line can be determined many ways In the United Statesthe poverty line was created in 1963 using the minimum cost of achievingan adequate diet based on US Department of Agriculture food plans Non-food expenditures were accounted for by observing that poor householdsgenerally spend about a third of their total budget on food the food povertyline was multiplied by 3 to obtain the total poverty line This line has beenupdated over time by adjusting for changes in the cost of living A com-monly used international poverty line is the World Bankrsquos use of $1 perperson per day (in 1993 prices) to reflect extreme poverty (this numberwas recently revised to be $125 in 2005 prices) and $2 per day (2005prices) to reflect moderate poverty

With a household survey incomes or expenditures can be comparedto the poverty line households with values below the line are poor Policymakers are interested not only in which households are poor but also inwhere the poor are located what they do and how poverty has changedover time Monetary indices of poverty are used to address these con-cerns and the most commonly used poverty index called the Foster GreerThorbecke (FGT) Index2 is one that reflects the prevalence (proportion ofthe total population that is poor) depth (the degree of shortfall below thepoverty line) and severity of poverty (the degree of inequality among thepoor) This index gives policy makers a nuanced view of the total povertypicture for example a policy may increase the depth of poverty amongsome while reducing the total proportion of the population that is poorAccording to the most recent estimates 40 percent of the population inSouth Asia was poor in 2005 compared to 51 percent in Sub-Saharan Af-rica In contrast the poverty severity measures were 3 percent for SouthAsia compared to over 10 percent for Sub-Saharan Africa indicating a farmore serious problem in poverty severity in Sub-Saharan Africa than inSouth Asia

1 For more information see Martin Ravallion ldquoPoverty comparisons A guide toconcepts and methodsrdquo Living Standards Measurement Study Working Paperno 88 (Washington DC World Bank 1992)

2 J Foster J Greer and E Thorbecke A Class of Decomposable Poverty Mea-sures Econometrica Volume 52 (1984) pp 761ndash66


29

dam-building irrigation and water supply schemes road constructionand maintenance programs mdash are examples of social safety nets thatmay reduce vulnerability to poverty and build infrastructure for agri-cultural development

Chronic poverty is often caused by very different factors house-holds do not have access to enough human physical natural and otherassets to earn sufficient incomes for minimum levels of well-being Pov-erty traps caused by insufficient assets severely degraded natural re-sources and other factors are difficult to escape and often require long-term investments in asset building access to new factors of productionand improved institutions

Agricultural Development and the PoorOne of the most common misconceptions about poverty is that it islargely an urban problem Pictures of teeming slums with inadequatesanitation and rotting infrastructure help bolster this perception Incontrast rural residents are thought to live in relatively spacious con-ditions and to be able to rely on own-production of foods in times ofdire need In fact on a global level the rural poor make up more thanthree-fourths of the total poor and rural poverty is twice as prevalentas urban poverty2 Rural poverty is a major problem and as we will seethroughout this book agricultural development can play a major rolein its reduction but agricultural development can also alleviate urbanpoverty

Agricultural technology has direct impacts on the rural poor byincreasing incomes of farmers many of whom may be poor Care mustbe taken during development and subsequent release of new technolo-gies to ensure that they are accessible to poor producers but evidenceshows that in many cases poor producers benefit directly Indirect ben-efits to the poor from growth in agriculture come from two primarysources increased demand for labor and increased supply of food caus-ing food prices to drop The latter benefit can be substantial and is animportant reason why global poverty fell from the early 1980s untilrecently Food price declines have led to higher levels of living even for

2 The prevalence of global rural poverty was estimated in 2005 to be 297 percent com-pared to a 132 percent poverty rate in urban areas of developing countries Whilerural poverty has declined relative to urban poverty due to urbanization 754 per-cent of the developing worldrsquos poor are found in rural areas Source MartinRavallion Shaohua Chen and Prem Sangraula 2007 ldquoNew Evidence on the Ur-banization of Global Povertyrdquo Policy Research Working Paper forthcoming WorldBank


30

people who do not depend directly on agriculture When global foodmarkets tighten as they did recently poverty rises due to the indirecteffect of higher food prices

HUNGER MALNUTRITION and FAMINEHunger is a silent crisis in the world In times of famine it can tear atthe heartstrings as media attention focuses on its dramatic effects Infact the most extreme type of hunger is severe calorie and protein un-dernutrition during a famine However more pervasive is chronic un-der-nutrition and malnutrition associated with poverty illness igno-rance maldistribution of food within the family and seasonal fluctua-tions in access to food We begin our discussion of hunger with thecontrast between famines and chronic malnutrition

FaminesFamine is marked by an acute decline in access to food that occurs in adefinable area and has a finite duration This lack of access to food usu-ally results from crop failures often in successive years due to droughtflood insect infestation or war During a famine food may actually bepresent in the affected area but its price is so high that only the wealthycan afford it Food distribution systems may break down so that foodcannot reach those who need it

Famines have occurred throughout history In recent years theirprevalence has been greatest in Sub-Saharan Africa but famines alsohave occurred in North Korea periodically since 1995 in Kampuchea(formerly Cambodia) in 1979 Bangladesh in 1974 India in 1966 to 1967and China in 1959 to 1961 The latter was the worst famine of the 20thcentury and resulted in an estimated mortality of at least 16 millionpeople

Famine is the extreme on the hunger scale because it causes ex-treme loss of life and concurrent social and economic chaos over a rela-tively short period of time As access to food falls people begin by bor-rowing money and then selling their assets to acquire money to pur-chase foods Subsistence farmers sell their seed stocks livestock plowsand even land Landless laborers and other poor groups lose their jobsor face steeply higher prices for food at constant wages As the famineintensifies whole families and villages migrate in search of relief Thetelltale signs of acute malnutrition and eventually sickness and deathappear (see Box 2-2)

Fortunately progress is being made against famine Although largevariations occur in annual food production in individual countriesand world population continues to grow the frequency and intensity


31

BOX 2-2

NATURAL DISASTER and FAMINE in BANGLADESH1

From June to September 1974 severe flooding in the Brahmaputra Riverin Bangladesh led to large-scale losses of the dry-season rice crop andcreated pessimism about the prospects for the transplanted spring cropThe price of rice doubled in fewer than three months during and after thefloods Two months after this sudden upturn in rice prices unclaimed deadbodies began to be collected in increasing numbers from the streets ofDacca the capital city Similar collections were reported throughout thecountryside The government of Bangladesh officially declared a famine inSeptember 1974 Estimates of the final death toll vary widely but mostagree that more than 1 million people died of starvation or related causesduring and after the famine

Insufficient food stocks clearly hindered the governmentrsquos efforts toprovide relief Inadequate relief stocks should not however be confusedas a cause of the famine the evidence clearly shows that in 1974 ad-equate food grains were available in Bangladesh to avoid famine Thissame evidence shows that the districts most affected by the famine evenhad increased availability of food per person compared to prior years

What then caused the famine Landless laborers and farmers withless than half an acre of land were most severely affected by the famineThese groups whose only true asset was their labor power found that thevalue of their labor declined greatly relative to the price of rice Despiteavailable food in local markets they were unable to purchase it The flooddid not immediately affect food supply since the lost crop would not havebeen harvested until the next year anyway It did however greatly loweremployment opportunities Lower wages combined with higher rice priceswere the root causes of the 1974 Bangladesh famine

1 Most of this material is drawn from Amartya K Sen Poverty and Famines An

Essay on Entitlement and Deprivation (New York Oxford University Press 1981)

of famines has decreased due to improved information and transporta-tion networks increased food production and reserves and dedicatedrelief organizations Much of the starvation we see during famines nowoccurs in areas where transportation systems are deficient and wherepolitical conflict thwarts relief efforts The recent North Korean faminewas due to a combination of natural disasters economic collapse andlack of political will to alleviate the problem

Chronic Hunger and MalnutritionAs devastating as famines are they account for only a small fraction ofhunger-related deaths Famines can be attacked in a relatively shortperiod of time if political conflict in the affected country does not


32

hamper relief efforts Chronic hunger and malnutrition affect a muchgreater number of people and are more difficult to combat

Although no accurate figures on the prevalence of malnutritionexist the World Health Organization (WHO) estimates that a half-bil-lion people suffer from protein and calorie deficiencies and perhaps anequal number suffer from malnutrition caused by inadequate intakesof micronutrients principally iron vitamin A and iodine Thus roughly15ndash20 percent of the worldrsquos population suffers from some form ofmalnutrition Malnutrition does not affect all segments of the popula-tion equally Preschool children and pregnant and nursing women areparticularly vulnerable to its dangers

Serious malnutrition in developing countries reflects primarilyunder-nourishment mdash a shortage of food mdash not an imbalance betweencalories and protein The availability of calories per capita by countryis illustrated in Figure 2-1 Many of the countries with very low per-capita calorie availability are found in sub-Saharan Africa A close butnot perfect correspondence exists between low calorie availability andthe low-income countries identified in the previous chapter The majornutritional problem was once believed to be the shortage of proteinAlthough dietary protein is important many nutritionists now believethat when commonly consumed cereal-based diets meet energy (calo-rie) requirements it is likely that most protein needs will also be satis-fied for most people older than about two years of age Thus for ev-eryone except infants the greatest concern is the total quantity of foodavailable to eat and this quantity can most readily be measured bytotal dietary energy in terms of calories per day In settings where over-all energy intake meets minimum needs any remaining protein or mi-cronutrient deficiencies can often be improved with rather small invest-ments to improve the quality of the diet


Table 2-1 Estimated Number of People Affected by Preventable

Malnutrition Worldwide

Morbidity Estimated Group due to Prevalence most

Deficiency Malnutrition of Morbidity affected

Protein and energy Underweight 150000000 ChildrenProtein and energy Stunted growth 182000000 ChildrenIron Anemia 2000000000 Every age and sexVitamin A Blindness 250000 - 500000 Every age and sexIodine Brain damage 50000000 Every age and sex

Source World Health Organization 2003

33


Fig

ure

2-1

D

aily

ca

lori

e a

va

ilab

ility

pe

r ca

pita

2

00

3 (S

ou

rce

F

AO

STA

T d

ata

)

34

Nevertheless areas can be found with adequate calorie intake butdeficient protein or micronutrient intake Regions where diets are basedon staples such as cassava or sugar rather than cereals are more likelyto be deficient in protein even if calories are adequate Iodine deficiencyis common in regions far from the sea for example parts of the Andesin South America Iron deficiency is a particularly serious problemamong women of childbearing age all over the world and vitamin Adeficiency is common in several countries

Consequences of Hunger and MalnutritionStunted growth reduced physical and mental activity muscle wast-ing increased vulnerability to infections and other diseases and in se-vere cases death are the most common consequences of calorie defi-ciencies Death most frequently results from dehydration caused bydiarrhea whose severity is closely linked to malnutrition Chronic pro-tein malnutrition results in stunted growth skin rash edema and changeof hair color A diet relatively high in calories but low in protein canresult in an illness known as kwashiorkor while a diet low in both calo-ries and protein can result in an illness known as marasmus People canlive about a month with kwashiorkor 3 months with marasmus 7ndash10million people die each year from the two diseases

Iron deficiency anemia affects muscle function and worker pro-ductivity Vitamin A deficiency is a leading cause of childhood blind-ness and often results in death due to reduced disease resistance Io-dine deficiencies cause goiter and cretinism

There is little doubt that hunger and malnutrition result in severephysical and mental distress even for those who survive the infectionsand diseases Malnutrition can affect the ability of a person to workand earn a decent livelihood as mental development educationalachievement and physical productivity are reduced People withsmaller bodies because of inadequate childhood nutrition are paid lessin agricultural jobs in many countries Lower earnings perpetuate theproblem across generations leading to a vicious cycle of malnutritionand poverty

Measuring Hunger and MalnutritionMeasuring the extent of hunger and malnutrition in the world is diffi-cult Disagreement surrounds definitions of adequate caloric and pro-tein requirements while data on morbidity and mortality reflect thecombined effects of sickness and malnutrition


35

Nutritional assessments are usually attempted through food bal-ance sheets dietary surveys anthropometric surveys clinical exami-nations and administrative records Food balance sheets place agricul-tural output stocks and imports on the supply side and seed for nextyearrsquos crops exports animal feed and wastage on the demand sideDemand is subtracted from supply to derive an estimate of the balanceof food left for human consumption That amount left can be balancedagainst the Food and Agricultural Organization of the United Nationsrsquo(FAO) tables of nutritional requirements to estimate the adequacy ofthe diet This method provides rough estimates at best due to difficul-ties in estimating agricultural production and wastage in developingcountries

Food balance sheets provide only a picture of average food avail-ability Malnutrition like poverty is better measured if the distribu-tion of food intake or of other indicators is also taken into accountAverage national food availability can be adequate while malnutritionis common in certain areas or among particular population groupsEven within families some members may be malnourished while

Woman and child in Ethiopia (photo by Mesfin Bezuneh)


36

others are not To measure malnutrition accurately information onhouseholds or individuals is required

Household and individual information can be obtained from di-etary or expenditure surveys and from clinical or field measurementsof height weight body fat and blood tests These methods are expen-sive and seldom administered on a consistent and widespread basis foran entire country They can be effective however in estimating malnu-trition among population subgroups Since preschool children are mostvulnerable to nutritional deficiencies random surveys to measure ei-ther their food intakes or anthropometry (body measurements) can pro-vide a good picture of the extent of malnutrition Another procedurefor estimating the extent of malnutrition is to utilize existing data inhospital health service and school records Unfortunately these sta-tistics can be biased because the records for rural areas are scarce thepoor are the least likely to have sought medical attention and the qual-ity of the information in the records is uneven For example many coun-tries in Latin America record the heights weights and ages of first-year elementary school children Unfortunately many members of thepoorest populations groups do not attend school Because of these bi-ases estimates of malnutrition among school-aged children generallyunderstate the true problem One reason why malnutrition is misun-derstood is that its measurement is so difficult

CAUSES of POVERTY HUNGER and MALNUTRITIONA variety of factors contribute to poverty hunger and malnutritionbut inadequate income is certainly the most important underlying causeThe World Bank estimates that redistributing just 2 percent of the worldrsquosoutput would eliminate most poverty and malnutrition But such re-distribution would be feasible only if those who now go hungry hadsome way to obtain that food or something to offer in exchange Ifpeople for whatever reason produce too few goods and services theylack income to buy food and they go hungry Even in times of faminedecreased purchasing power rather than absolute food shortages is of-ten the major problem as food may be available in nearby regions In-comes in the affected area have declined so that people cannot afford tobuy food from unaffected areas

Figure 2-2 contains a schematic diagram of the determinants ofhousehold well-being and individual nutritional status Access to pro-ductive assets such as land labor natural resources and the policy re-gime (prices and other factors) determine household income and well-being Income including the value of own production and in-kindtransfers determine how much food can be purchased or consumed by


37

Figure 2-2 Determinants of household well-being and individualnutritional status

the family Total food purchases and consumption do not howevertell the entire story Health status and family food preparation alongwith how food is distributed among members of the family help deter-mine how food available to a family is related to individual nutritionalstatus

Health and MalnutritionPovertyrsquos interaction with malnutrition is often compounded by infec-tious diseases and parasites that reduce appetites cause malabsorptionof food or result in nutrient wastage due to fever and other metabolicprocesses Health problems and malnutrition exhibit a synergistic re-lationship infections and parasites lead to malnutrition while mal-nutrition can impair the immune system thus increasing the risk ofinfection and the severity of the illness3 Measles parasites intestinal

3 See Joanne Leslie ldquoInteractions of Malnutrition and Diarrhea A Review of Researchin J Price Gittinger Joanne Leslie and Caroline Hoisington eds Food Policy Inter-acting Supply Distribution and Consumption (Baltimore Johns Hopkins UniversityPress 1987) pp 355ndash70 for additional discussion


38

infections and numerous other health problems are prevalent in devel-oping countries Many of these health and sanitation problems lead todiarrhea which in turn can lead to dehydration and death Health isdetermined by among other things household sanitary conditionsThese in turn are influenced by family assets and income and by gov-ernment programs There is room for optimism related to many child-hood diseases The World Health Organization reports that because ofsustained efforts to vaccinate children the majority of the worldrsquos chil-dren under one year old are now vaccinated against six common child-hood diseases However the last twenty-five years have seen HIV-AIDSbecome an escalating problem first in Africa and increasingly in AsiaMalaria also remains a serious problem in many countries especiallyin Africa where 14 countries report over 10 percent of their populationsinfected4

Poor Nutritional PracticesIgnorance of good nutritional practices maldistribution of food withinthe family and excessive demands on womenrsquos time can all contributeto malnutrition and perpetuate poverty The results of studies that haveexamined each of these factors provide conflicting evidence as to theirimportance Each factor is undoubtedly significant in some areas of theworld but not in others For example in parts of Northern India andBangladesh evidence indicates that adult males receive a dispropor-tionate share of food in the family compared to young females but thisis not universally the case5 Problems that appear to be related to igno-rance and are in fact discriminatory are sometimes related to cultureand often to poverty

Some evidence shows that whether the male or female controlsincome within a family helps determine how food is distributed Therealso is strong evidence that increased educational opportunities forwomen are linked to improved nutritional practices and more equi-table distribution within the family

Seasonal and Cyclical HungerAs with poverty many people in developing countries move in andout a state of malnutrition There are hungry seasons hungry yearsand hungry parts of the life cycle A given individual may or may notsurvive these periods and frequently experiences lasting physical men-tal and emotional impacts even if he or she does survive

4 UNDP Human Development Report 2005 (New York Hoechstetter 2005)5 See Michael Lipton ldquoVariable Access to Foodrdquo in Gittinger Leslie and Hoisington

eds Food Policy pp 385ndash92


39

Hungry seasons occur because of agricultural cycles In the weeksor months preceding a harvest food can be in short supply This nor-mal seasonality can be exacerbated if crops in a particular year are shortor households are unable to effectively store food or income In certainseasons of the year particularly the rainy seasons disease and infec-tion are more common Likewise droughts floods and insect infesta-tions happen in some years but not in others Young children are vul-nerable in part due to dangers associated with diarrhea Pregnant andlactating women experience extra nutritional demands on their bodieswhile the elderly suffer disproportionately as well particularly if theylack the support of their children

SOLUTIONS to POVERTY HUNGER and MALNUTRITION

PROBLEMSSolutions to hunger and malnutrition problems depend on the typesand causes but alleviation of poverty is needed for a long-term solu-tion Famine relief strategies differ from solutions to chronic hungerand malnutrition but even in famines the poor are most likely to beafflicted Unfortunately there is no magic bullet to the solution of pov-erty A concerted effort across many fronts is required

Raising IncomesLifting vulnerable people out of poverty is central to any long-termstrategy to alleviate malnutrition in the world For subsistence farmersthis strategy implies raising productivity increasing access to land orcreating opportunities to migrate to off-farm employment For the popu-lation in general it implies a need for increased employment opportu-nities combined with higher productivity per person The latter requiresgrowth in jobs and in capital per job in the non-farm sector Enhancededucation an investment in human capital will also increase produc-tivity and incomes Equal access to jobs and expanded economic op-portunities in impoverished regions can also help reduce poverty Eco-nomic growth without increased employment for the poorest segmentsof the population will do little to reduce hunger Programs to increaseemployment and earnings opportunities for women are particularlyimportant partly because these opportunities help accelerate the tran-sition to lower birth rates (for reasons discussed in Chapter 4)

Agricultural ProductionAgricultural productivity is particularly important for the incomes andnutritional status of the poor because in most developing countries the


40

poorest people have no choice but to be farmers and they feed them-selves and their families using their own labor and available land In-creased productivity for those farmers not only raises their incomesand purchasing power but can also lower the price of food for thosewho must buy it to feed their families making it possible for the poorto purchase larger quantities Hence methods for increasing food pro-duction are a major focus of this book Increased use of purchased in-puts improved marketing and credit institutions improved agricul-tural policies better education effective agricultural research and in-vestment in infrastructure such as roads storage and irrigation sys-tems are particularly important

Safety NetsAs noted above much poverty is transitory and caused by fluctuationsin income These fluctuations in turn can have dramatic impacts onnutrition and they can lead to longer-term poverty because householdsoften invoke harmful coping mechanisms to deal with them Safety netprograms such as cash and in-kind transfers public works programsconditional cash transfers and fee waivers for health and educationcan distribute wealth to the most needy and provide insurance againstrisks By protecting vulnerable farmers against the adverse consequencesof risk safety nets allow them to make better investment decisions andadopt new technologies and production practices (such as new seedsand fertilizers) that increase mean incomes Safety nets need to be prop-erly targeted and efficiently administered to avoid waste but muchhas been learned in recent years about their design and implementa-tion Many countries have now successfully implemented them6

Food Intervention ProgramsFood price subsidies supplementary feeding programs and food forti-fication can each help reduce nutritional deficiencies Few developingcountries have come close to eliminating malnutrition without somecombination of these practices However these programs alone cannotsolve problems of chronic malnutrition

General food price subsidies were used in Sri Lanka for severalyears and helped relieve malnutrition and extend life expectancy to aremarkable degree However food price subsidies are expensive and

6 See Margaret Grosh Carlo del Ninno Emil Tesliuc and Azedine Ouerghi For Protec-tion and Promotion The design and implementation of effective safety nets (WashingtonDC The World Bank 2008)


41

even Sri Lanka decided to cut back its general subsidy and instead totarget specific groups A study by the International Food Policy Re-search Institute (IFPRI) of the Sri Lankan food stamp scheme indicatedthat the targeted subsidies did reduce program costs substantially buthad mixed results in reaching the poor7 Food price subsidy schemessometimes lower prices thereby reducing incentives for domestic foodproduction

Several countries have instituted supplementary feeding programsfor vulnerable groups such as children and pregnant and nursing moth-ers In some cases these programs provide food to be consumed in aspecific location such as in schools or health centers while in othersfood may be consumed at home In either case while total family foodconsumption rises that of the food recipient usually grows by less thanthe total donation Some food is shared with family members The evi-dence on supplementary feeding programs indicates that they oftenare associated with measurable improvements in nutritional status butthey tend to be expensive for the benefits received Administration ofthese projects can be very difficult In some cases these programs havebeen assisted with food aid from other countries as discussed below

Another food intervention program involves fortification by add-ing specific nutrients during processing The most successful exampleis iodine fortification of salt to prevent goiter Vitamin A also has provenrelatively inexpensive to add to foods such as tea sugar margarinemonosodium glutamate and cereal products Attempts have been madeto fortify food with iron to prevent anemia but reducing iron deficiencyanemia has proven to be a complex problem In general the effective-ness of adding nutrients to food is reduced by the fact that the poor buyfew processed foods there is often cultural resistance to the fortifiedproduct and the cost of fortification is prohibitive In many cases theldquofortifiedrdquo food has been shown to have no more nutrients than unfor-tified foods quality control can be prohibitively expensive in develop-ing countries Recent success in incorporating vitamin A and iron intorice through genetic modification provides another avenue for reduc-ing these micro-nutrient problems

Health ImprovementsEfforts to improve sanitation reduce parasite infections and pre-vent dehydration caused by diarrhea can reduce malnutrition and

7 Neville Edirisinghe ldquoThe Food Stamp Scheme in Sri Lanka Costs Benefits andOptions for Modificationrdquo International Food Policy Research Institute ResearchReport No 58 Washington DC March 1987 pp 1ndash85


42

mortality substantially For example oral rehydration therapy involv-ing the use of water salt and sugar in specified proportions to replacefluid lost during diarrhea can significantly reduce diarrhea-relateddeaths Investments in sanitation services such as potable water andlatrines when combined with effective education programs can im-prove nutritional status by reducing diarrhea Better health services suchas immunization programs can reduce the incidence and intensity ofdiseases that contribute to malnutrition

Political Social and Educational ChangesPolitical stability can help alleviate both famine conditions and chronichunger The famine in Ethiopia in 1983 and 1984 was exacerbated bypolitical upheaval that hampered relief efforts The recent famine inNorth Korea also has political roots Because programs to curb chronichunger and malnutrition require long-term commitments they are nec-essarily rendered less effective by political instability Responsible po-litical action can improve income distribution in a country thereby re-ducing poverty and malnutrition

Social cultural and educational factors also come into play Forexample declining rates of breastfeeding in some countries have con-tributed to malnutrition as substitutes can be less nutritionally com-plete are often watered down and in some cases are even unsanitaryIn other cases breastfeeding may continue too long without the addi-tion of needed solid foods While social and cultural factors changeslowly and economic factors influence decisions education can helpIn fact few consumption practices are totally unaffected by educationNutrition education programs especially when combined with income-generating projects or efforts to increase a familyrsquos access to nutrientssuch as home gardening have been shown to lead to improved nutri-tional status

International ActionsInternational actions can help alleviate poverty famine and chronicmalnutrition Because increased incomes are so important to improvednutrition opening of markets in more developed countries and debtrelief are actions that can help especially in the long run Foreign as-sistance can provide short-run relief and when properly designed fa-cilitate long-run development

Reduced barriers by developed countries to imports from devel-oping countries will enable low-income nations to gain greater accessto world markets The foreign exchange earned can be used for devel-opment efforts and food imports when needed


43

Rural Health Center in Colombia

Debt relief is a dire need in many countries particularly wherepast governments were not held accountable for how loans were spentso that the funds were not invested productively When bad debts ariseit is usually in the long-run best interests of both lender and borrowerto share some of the burden of adjustment to reduce expectation ofloan repayment in line with the actual productivity of the loan Formore details on this important topic see Chapter 19

Foreign assistance includes food aid as well as technical and fi-nancial assistance Gifts and loans of food at low interest rates can helpsolve part of the hunger problem if the food assistance is properly ad-ministered Food aid can relive short-term famines and be used insupplementary feeding programs and in other activities such as foodfor work programs to help generate wealth in developing countriesMuch more important for the long run financial and technical assis-tance can help developing countries expand their capital bases andimprove methods for producing food and other products allowing themto import or develop the new technologies they need to break out ofpoverty

SUMMARYIn this chapter the types and consequences of poverty hunger andmalnutrition were examined We now have much better informationon the distribution and extent of poverty Even though it is difficult tomeasure accurately the extent of hunger and malnutrition in the world


44

it is known that chronic malnutrition affects more people than do fam-ines Malnutrition results in reduced physical and mental activitystunted growth blindness anemia goiter cretinism mental anguishand death

The causes of hunger are many but virtually all these causes arerelated to poverty Infections diseases and parasites poor nutritionalpractices and seasonal variability in food supplies all contribute to theseverity of malnutrition Solutions to hunger and malnutrition includeraising incomes increasing agricultural production in developing coun-tries food intervention programs improving health systems politicalsocial and educational changes and a series of international activitiessuch as food aid and other foreign assistance debt relief opening offoreign markets and price stabilization

IMPORTANT TERMS and CONCEPTSAnthropometryChronic malnutritionDebt reliefDietary surveysFamineFood aidFood balance sheetsFood fortificationFood price subsidiesForeign assistanceKwashiorkor marasmus goiter anemia and cretinism

Looking AheadHunger and malnutrition imply a need for food but not necessarily ademand for food unless that need is backed by purchasing power Fooddemand is influenced by income prices population and tastes andpreferences In the next chapter we will examine tools that can helpmeasure or project the extent to which various demand factors af-fect food consumption We will explore how demand interacts withsupply to determine prices The tools discussed are the first of a set oftheories and methods presented in this book that can improve yourability to analyze and not just observe food and development problemsand policies

Maldistribution of foodOral rehydration therapyPolitical upheavalPovertyPrice stabilizationProtein and calorie deficiencySafety netsSeasonal and cyclical hungerSupplementary feeding programsTransitory povertyVitamin and mineral deficiencyVulnerability


45

QUESTIONS for DISCUSSION1 What are the causes of transitory poverty What can be done to

alleviate the problem2 Why is it important to have information on the depth and severity

of poverty in addition to the poverty prevalence3 Has poverty gone down globally over time4 Is famine more widespread today than in the past5 Is protein deficiency a more severe problem in developing coun-

tries today than is calorie deficiency Why or why not6 If people in the United States moved to a diet in which they con-

sumed more grain and less meat would there be more food forpeople in poor countries of the world Why or why not

7 What are the principal causes and consequences of hunger8 How do we measure the adequacy of food availability in a country9 What are some solutions to hunger and malnutrition problems10 How might safety net programs contribute to long-term

development11 Why and how does political upheaval contribute to famine12 What are the major interactions between health and nutritional

problems

RECOMMENDED READINGSFlores Rafael and Stuart Gillespie Health and Nutrition Emerging and

Reemerging Issues in Developing Countries IFPRI 2020 Vision Focus 5February 2001 (Available at website httpwwwifpriorgindex1htm)

Foster Phillips and Howard D Leathers The World Food Problem (Boul-der Colorado Lynne Reinner Publishers 1999)

Grosh Margaret Carlo del Ninno Emil Tesliuc and Azedine OuerghiFor Protection and Promotion The design and implementation of effectivesafety nets (Washington DC The World Bank 2008)

Mellor John W and Sarah Gavian ldquoFamine Causes Prevention andReliefrdquo Science vol 235 (January 1987) pp 539ndash45

Pinstrup-Andersen Per and Rajul Pandya-Lorch The Unfinished AgendaPerspectives on Overcoming Hunger Poverty and Environmental Degrada-tion (International Food Policy Research Institute Washington DC2001) especially Parts 1 and 2 (Available at IFPRI website httpwwwifpriorgindex1htm)

Sen Amartya K Poverty and Famines An Essay on Entitlement and Depri-vation (New York Oxford University Press 1981)


46

Siegel Paul B and Jeffrey Alwang An Asset Based Approach to SocialRisk Management SP Discussion Series 9926 Human DevelopmentNetwork Social Protection Unit the World Bank Washington Octo-ber 1999 67 pp UN Standing Committee on Nutrition Fifth Report onthe World Food Situation Nutrition for Improved Development Outcomes(New York United Nations 2004) 143 pp

UNDP Human Development Report 2007ndash2008 (New York PalgraveMacmillan Press 2007)

World Health Organization World Health Report 2005 Make Every Motherand Child Count (Geneva WHO Press 205) 252 pp


47

Rather than a race between food and population the food equationshould be viewed as a dynamic balancehellip between food supply anddemand mdash J W Mellor and B F Johnston1

THIS CHAPTER1 Discusses the concept of effective demand and the relative impor-

tance of income population preferences and prices in determin-ing the demand for food as development occurs

2 Explains the importance of income elasticities and price elasticitiesof demand for projecting consumption patterns and for develop-ment planning

3 Describes how supply interacts with demand over time to deter-mine price levels and trends

EFFECTIVE DEMAND for FOODThe need for food and the effective demand for food are related butdistinct concepts Food needs correspond to the nutrient consumptionrequired to maintain normal physical and mental growth in childrenand to sustain healthy bodies and normal levels of activity in adultsThe effective demand (often just called demand) for food is the amountof food people are willing to buy at different prices and income levelsgiven their needs and preferences

In this chapter we consider the means for analyzing food demandchanges resulting from income and price changes The goal is to helpyou predict the likely impacts of a change in either factor on consump-tion Later wersquoll see how these food demand pressures interact with

CHAPTER 3

Economics of Food Demand

1 John W Mellor and Bruce F Johnston ldquoThe World Food Equation Interrelationsamong Development Employment and Food Consumptionrdquo Journal of EconomicLiterature vol 22 (June 1984) p 533

48

feed and bio-fuel demand and with supply conditions to determinechanges in economic well-being

Determinants of Food DemandThe quantity demanded of food or of any commodity is influencedby two major factors its price relative to all other goods and con-sumersrsquo incomes relative to all prices In order to isolate each effecteconomists use a thought-experiment in which we imagine a changein only one variable at a time and trace out the resulting change inanother

When considering the effect of a change in price on quantity con-sumed we expect a higher price to cause a lower quantity consumedand vice versa This inverse relationship between price and quantityconsumed is often called the law of demand and is illustrated on a graphusing a market demand curve (Fig 3-1) The slope and location of the

Figure 3-1 Hypothetical demand curves for a commodity A reduction in theprice of the commodity all other things being equal will cause a movementalong a demand curve say from point A to point B and an increase in quan-tity demanded Changes in the determinants of demand mdash population in-come prices of other goods and preferences mdash can cause a shift in de-mand say from point A on demand curve D to point Arsquo on demand curve Drsquo


49

market demand curve are determined primarily by income per personthe number of people and the distribution of income among thosepeople prices of other goods and other factors such as consumer pref-erences and consumption technologies Changes in any of these factorscause the demand curve to shift as shown by the shift from curve D tocurve Drsquo in Figure 3-1 Such a shift might be caused by a rise in incomewhich increases the quantity demanded at a given price Alternativelythe shift might be caused by population growth at a constant per-capitaincome This income effect on demand varies by commodity Becausethe influence of income on food demand is not constant across coun-tries within countries or by commodity it is important to have a mea-sure of the sensitivity of demand for food and for particular goods tochanges in income The measure used is called the income elasticity ofdemand

Income Elasticities of DemandThe income elasticity of demand is defined as the percentage by which thequantity demanded of a commodity will change for a one percent changein income other things remaining constant2 For example when per-capita income increases by 1 percent if quantity demanded of a com-modity increases by 03 percent its income elasticity of demand is 03Typically for a very low-income country the elasticity of demand forfood as a whole is around 08 while for a very high-income country it isaround 01 This difference in income elasticities means that changes toincome have a much larger relative impact on food demand in low-income countries than in high-income countries

By necessity poor people have no choice but to spend the bulk oftheir income on food mdash at times as much as 80 percent mdash and whentheir incomes rise they spend a high proportion of that increase on morefood Eventually however further increases in income tend to be spenton other things This change in the proportion of the familyrsquos budgetspent on food or Engelrsquos law says that as income increases people spenda smaller proportion of their total income on food This process is re-flected in Fig 3-2 which shows the percentage of total income spent onfood for a number of countries with different levels of per-capita in-come The distinct downward slope associated with Engelrsquos lawwould be similar if the graph were constructed for individuals within

2 If we define n to be the income elasticity of demand for a good Q to be the change inquantity demanded for that goodand I to be a change in income then

CHAPTER 3 mdash ECONOMICS OF FOOD DEMAND

50

a country where richer people spend a smaller fraction of their incomeon food

Engelrsquos law reflects in part the limited capacity of the human stom-ach but note that total expenditures on food generally continue to risewith income even as the proportion of the budget spent on food de-clines Rising incomes lead people to consume more total calories andalso to consume more expensive foods These foods are often morehighly processed (for example as people switch to bread instead ofporridge) and include more animal products (meat dairy eggs andfish) as well as more fruits and vegetables The transition in consump-tion from a few inexpensive starchy staples such as cassava rice orcorn to this greater variety of more expensive foods is known as Bennettrsquoslaw named after the same MK Bennett mentioned in Chapter 1 Butnote that when consumers switch from starchy staples to animal prod-ucts demand for animal feed can rise very fast consumers may reducetheir direct consumption of cereal grains as food while increasing theirtotal usage of cereal grains as animal feed

Diversification and improvement of the diet with rising incomesimplies that income elasticities vary by commodity and by income levelTo show patterns of demand among some of the poorest people in the

Figure 3-2 Relationship between private consumption and percentage ofincome spent on food most countries (Source World Bank Indicators on-linedatabase 2005 and USDAERS 2008)


51

Table 3-1 Selected Income Elasticities of Demand

for Agricultural Commodities in Sub-Saharan Africa

Region Wheat Rice Maize Millet Roots Pulsesand tubers

The Sahel 092 093 046 015 mdash 004 mdash 014West 087 065 015 009 012 042Central 055 093 066 028 mdash 021 014Eastern 051 058 028 001 029 002Southern 146 056 035 017 mdash 015 mdash 0002

Source Cheryl Christensen et al Food Problems and Prospects in Sub-Saharan AfricaThe Decade of the 1980rsquos US Department of Agriculture Economic Research Ser-vice Foreign Agricultural Research Report No 186 (Washington DC August 1981)

Table 3-2 Selected Income Elasticities of Demand for Cereals

and Livestock Products in Various Counties

Country Cereals Beef Pork Poultry Cowrsquos Eggs

milk

Brazil 015 058 029 064 045 055Egypt 004 080 070 130 100 070India 025 120 080 150 080 100lndonesia 029 150 080 150 020 120Kenya 035 100 070 120 059 130South Korea 009 080 073 100 049 080Malaysia 014 049 041 087 057 073Mexico -010 059 049 093 068 059Nigeria 017 120 100 100 120 120Philippines 022 120 093 100 150 100Thailand 006 056 047 050 080 050Turkey -005 080 050 120 080 080

Source J S Sarma Cereal Feed Use in the Third World Past Trends and Protections to2000 International Food Policy Research Institute Research Report No 57 ( Washing-ton DC December 1986) p 64

world Table 3-1 provides examples of estimated income elasticities invarious regions of Sub-Saharan Africa for a range of commodities Esti-mated income elasticities of demand for other countries and commodi-ties are presented in Table 3-2 Note that income elasticities for animalproducts are higher than for food grains and root crops Wheat and riceincome elasticities tend to be higher than those of coarse grains whileroots and tubers have consistently small elasticities The substantialvariation in income elasticities across countries reflects differences in


52

income and in preferences for foods For example the income elastic-ity of demand for beef is low in Latin America compared to Africapartly because initial levels of beef consumption are high in LatinAmerica

Most of the estimated income elasticities in Tables 3-1 and 3-2range between 0 and 1 These goods are called normal goods Goodswith income elasticities greater than 1 are called superior and repre-sent foods that can be thought of as luxuries in the diet in a particu-lar country If the income elasticity is less than 0 the goods are calledinferior because consumption of them actually declines as incomeincreases

The fact that income elasticities vary by commodity means thatincreases in income will result in an asymmetrical expansion in demandfor different commodities Demand for some commodities will expandby a greater percentage than that for others Depending on the natureof supply asymmetric expansion of demand can cause different pres-sures on commodity prices These changes in commodity prices caninfluence which crops producers grow and can help determine the di-rection of development

Price Elasticities of DemandSo far wersquove focused on per-capita income as the major determinant offood consumption per person but quantity demanded also respondsto price changes That price response was represented by movementsalong the demand curve in Figure 3-1 such as movement from point Aat a high price to point B with a relatively low price and a higher quan-tity demanded The degree of response in demand from a change inprice is measured by the (own) price elasticity of demand defined as thepercentage change in quantity demanded of a commodity given a onepercent change in its price other things remaining unchanged3 For ex-ample an own-price elasticity of -05 means that with a 1 percent changein price the quantity demanded will change in the opposite directionby 05 percent Own-price elasticities are typically negative reflectingthe negative slope of the demand curve If the own-price elasticity ofdemand is greater (in absolute value) than one the demand is said tobe elastic If it is equal to one it is said to be unit-elastic If it is less than

3 If we define E to be the price elasticity of demand for a good ldquoQ to be the change inquantity consumed and ldquoP to be the change in its price then


53

Potatoes in Ecuador

one it is said to be inelastic In a demand curve such as shown in Figure3-I an elastic demand has a relatively flat slope as small price changeslead to large quantity changes

Price elasticities of demand are useful for projecting demandchanges that might result from policies that manipulate prices or fromsupply shifts Cross-price elasticities which represent the percentagechange in quantity consumed of one commodity for a one percentchange in the price of another commodity holding all else equal alsoare important4 If the cross-price elasticity of demand is greater thanzero the two commodities are said to be substitutes If the cross-priceelasticity is zero the commodities are unrelated and if it is less thanzero they are called complements

When the price of a commodity changes the change in relativeprices causes most consumers to adjust the composition of the com-modity bundle they purchase so that they buy less of the good thatincreased in price This substitution is known as the substitution effectAlso if the price of a commodity increases the real purchasing powerof a given amount of income is reduced causing demand to changebecause of an income effect In most cases this income effect is a second

4 If we let E12

= the cross price elasticity for commodity 1 as the price of commodity 2changes DQ

1 = the change in the quantity demanded of commodity 1 as DP

2 = the

change in price of commodity 2 then


54

factor that reduces demand for the commodity experiencing the priceincrease5 For inferior goods however mdash commodities such as potatoesand cassava mdash the income effect may work in the opposite directionand partially offset the reduced consumption induced by the relativeprice increase

A price increase for a good will increase consumption of substi-tutes and decrease consumption of complements Part of these con-sumption changes are caused by changes in relative prices and part ofthem are due to income effects Because the income elasticity of de-mand for food is large for lowshyincome consumers and because theyspend a high proportion of their income on food low-income consum-ers often make larger adjustments in their commodity purchases thando high-income consumers when prices change

Obtaining Elasticity EstimatesThe effects of the changes in consumer behavior discussed above haveimportant implications for food policies and nutrition in less-devel-oped countries so food-policy analysts often need updated local esti-mates of the sizes of the income elasticities own-price elasticities andcross-price elasticities of demand for various commodities For exampleif a policymaker wants to project domestic food demand and the in-creased production or imports needed to meet that demand the in-come elasticity of demand for food is one of the pieces of informationneeded If an estimate of the effect on the calorie and protein intakes ofthe poor resulting from a decrease in the price of rice is needed it isimportant to have the own-price elasticity of demand for rice and thecross-price elasticities of demand between rice and other major foodsin the country disaggregated by income group

How are elasticity estimates obtained There are several ap-proaches and the appropriate procedure to use depends on the dataavailable and the questions being asked One type of estimate uses na-tional aggregate data on consumption production trade and pricesOften these data are published by international sources for severalcountries If data are available on the same factors for several countriesor for several regions in one country for one period of time they arecalled cross-sectional data If data are available for the same factors for

5 If the consumer is also a producer of the good which is often the case in rural areasof developing countries this income effect can be positive Commodity price in-creases can actually raise disposable income by increasing farm profits This profiteffect can be important when examining price responses among agricultural house-holds that both consume and produce goods


55

one country for several years they are called time-series data Often wehave combined cross-sectional and time-series data that is time-seriesdata for the same factors for a number of countries at the aggregatelevel These aggregate data are not very useful for studying short-termconsumption behavior for commodities within countries because tastesand preferences vary by country However the data may be helpful inmaking long-term projections

Sometimes household-level cross-sectional data are obtained bysampling many households to obtain information on income expendi-tures on different commodities prices paid and educational levels andother demographic characteristics6 Occasionally the data are collectedover time as well although not often because of the cost involved Ifone is interested in microeconomic issues associated with consumerbehavior for different income groups these household-level data arepreferred

Data (aggregate or household-level) are usually analyzed graphi-cally and then in a statistical or econometric (statistical model which in-corporates economic theory) model containing a set of demand equa-tions7 These equations include variables representing the factors men-tioned above Elasticities are calculated from the estimated coefficientsThese elasticities can be used for a variety of policy and planning pur-poses Sometimes when data do not exist in one country or at a periodin time studies from other countries or at a different period of time areused Elasticities from other studies may not be ideal but they are fre-quently used

Some countries have serious deficiencies in aggregate and house-hold-level data Often these data are unreliable or even nonexistentPolicy analysts who have little time or money to collect new data andestimate a model sometimes rely on relationships from economic theoryto obtain rough approximations of missing elasticities For example thereis a useful working assumption (called the homogeneity condition) thatthe sum of the own-price elasticity the income elasticity and the cross-price elasticities of demand for a commodity is equal to zero8

6 Collecting household data is a difficult and costly undertaking For an excellent over-view of topics in household data collection see Joachim von Braun and DetlevPuetz Data Needs for Food Policy in Developing Countries (Washington DC Interna-tional Food Policy Research Institute 1993)

7 See Angus Deaton The Analysis of Household Surveys (Baltimore Johns Hopkins Uni-versity Press 1997) especially Ch 1 for an advanced treatment of types of dataand their uses for policy analysis

8 That is for the ith commodity out of T commodities


56

Typically the sum of the cross-price elasticities for a commodity isgreater than zero and the own-price elasticity is negative Therefore theabsolute value of the own-price elasticity is usually larger than the incomeelasticity of demand One may have an estimate of the income elastic-ity of demand but not the own-price elasticity The homogeneity condi-tion can be used to obtain a rough estimate of the size of the price elas-ticity of demand given that income elasticity and assumptions aboutcross-price elasticities The homogeneity condition is just one exampleof the use of demand theory The main points are that data availabilityand quality limit the potential for economic analysis but a variety oftechniques can often be exploited to interpret the available data in use-ful ways

USING CONSUMPTION PARAMETERS for POLICY and

PLANNINGThe purpose of obtaining income and price elasticities is to assist withpolicy analyses and planning A variety of questions can be answeredwith the help of these elasticities For example what will happen to theconsumption of rice wheat sugar or meat when income rises Whatwill happen to the aggregate demand for food How will the demandchange for different commodities as absolute and relative prices changeWhat will be the effects of price and income policies on the poor Theanswers to these questions help policymakers anticipate future demandchanges and production needs and provide information for designingprice and income policies (see Box 3-1)

Income-Induced Changes in the Mix of Commodities

DemandedFor commodities with high income elasticities demand can grow veryrapidly when income rises Anticipating income growth policymakersmay want to support research or use other means for encouraging in-creased production of those commodities Otherwise prices will rise orimports increase in response to demand growth

Many highly income-elastic commodities such as milk and veg-etables have high nutritional value However some goods with rela-tively high nutritional value have low income elasticities9 If a govern-ment wants to increase consumption of a good with a low income

9 Elasticities reflect peoplersquos preferences for different attributes of the good includingtaste convenience and nutritional value A low value for an elasticity in not neces-sarily ldquobadrdquo it reflects consumer choices given income preferences prices andinformation about the good


57

BOX 3-1

IMPACTS of RICE PRICE POLICY on the POOR in THAILANDAngus Deaton used household-level data from Thailand to examine howpolicies affecting the price of rice would affect households in rural andurban areas and at different levels of income Because rural householdsare both producers and consumers of rice increased prices may or maynot benefit them They will gain as producers but lose as consumers (allurban rice consumers will lose as a result of higher rice prices) The key tothe analysis is to determine the net benefit ratio or the difference be-tween the value of production and the value of consumption divided bytotal household expenditures This ratio varies by total household incomeand the analysis shows that middle income producers will benefit mostfrom rice price increases High-income rural households benefit very littlefrom high prices (they earn their incomes outside agriculture or do notproduce much rice) Very low income rural households benefit by relativelysmall amounts because their marketed surplus is low Compared to plan-tation-type products (such as sugar and bananas) where product priceincreases benefit larger-scale producers rice price policy has its strongestimpact on the middle of the income distribution in rural areas of ThailandThe study shows that the impacts of price policy depend on the commodityin question and the socioeconomic conditions of producer and consumergroups

Source Angus Deaton The Analysis of Household Surveys (Baltimore JohnsHopkins University Press 1997) pp 187ndash90

elasticity it may have to resort to educational or subsidy programsEducational programs help change peoplersquos perceptions about physi-cal (nutrient) needs and the amount of these needs the food providesThese programs essentially lower the costs associated with acquiringinformation about nutrient needs and food nutrient content

At the world level differences in income elasticities by commod-ity imply that as per-capita income grows over time a relative shift willoccur in demand toward agricultural commodities with high incomeelasticities Many of these are high protein foods such as livestock prod-ucts One can also expect the grains fed to livestock such as corn toincrease in demand relative to food grains such as rice These types ofchanges have already been occurring over the past several years

Another impact of these patterns of income elasticities is that theaverage income elasticity of demand for food grains will decrease asdevelopment occurs Small income elasticities are associated withsmall price elasticities of demand With lower price elasticities increased


58

production of food grains would put sharp downward pressure on theirprices Lower prices should help poor consumers who continue to spendlarge shares of their budget on grains but may force many of the farm-ers producing these grains to switch to other commodities or leave ag-riculture

Changes in Aggregate Food Demand as Development

Proceeds10

The demand for food is influenced by population per-capita incomeprices and preferences As development proceeds the two primaryfactors shifting the demand for food outward are increases in popula-tion and in per-capita income These two major forces are captured bythe simple relation D = p + ng where D = rate of growth in the demandfor food p = rate of population growth n = income elasticity of de-mand for food and g = rate of increase in per-capita income

In the above equation population influences food demand in twoways First as presented by the term p it causes a proportional increasein demand However per-capita income equals total income dividedby population Therefore the net effect of population growth will notbe a proportional increase in demand because population growth mayslow the rate of per-capita income growth

Cattle in Colombia

10 Material in this section draws on John W Mellor Economics of Agricultural Develop-ment (Ithaca NY Cornell University 1966) pp 73ndash9


59

At the extreme if income does not expand at all with increasedpopulation the drop in per-capita income will almost completely nul-lify the direct effect of population growth For example developingcountries often experience a population growth rate of 3 percent peryear during the early stages of development The income elasticity ofdemand for food may be as high as 09 If total income remains con-stant then per-capita income will decline by 3 percent and the rate ofgrowth of demand will be D = 3 + 09(-3) = 0311

On the other hand if per-capita income is growing at 3 percent peryear while population is also growing at 25 percent (rates that are notuncommon in middle-income developing countries) even if the incomeelasticity of demand for food drops to 07 the rate of growth in demandfor food would be 46 percent per year Few countries have been able tomaintain such a rate of growth in agricultural production over timeThus food imports may be needed to meet growing demands

These examples ignore the fact that income growth in most less-developed countries is heavily dependent on agricultural output Ifagricultural output fails to grow per-capita income will grow veryslowly As development proceeds the proportion of employment andof total national income derived from agriculture shrinks Even so to-tal per-capita income still may be affected by the rate of growth of agri-cultural production because agriculture provides food capital and amarket for non-agricultural products These issues will be more fullydiscussed in subsequent chapters

The determinants of food demand are interrelated but as devel-opment proceeds certain patterns tend to hold for some of these fac-tors (see Table 3-3) As incomes increase population growth rates gen-erally increase slightly at first as death rates decline For a number ofreasons discussed in the next chapter population growth rates eventu-ally fall as income continues to grow The rate of per-capita incomegrowth is frequently highest in the middle-income countries and theincome elasticity of demand for food declines continually as incomegrows The result is that the rate of growth in food demand is highestfor middle-income countries These are the countries that are most likelyto need food imports Data indicate that middle-income countries fre-quently exhibit the largest increase in per-capita income and food im-ports even though they also experience the largest increases in agricul-tural production

11 The negative consequences of such a scenario should be obvious total demand willincrease by 03 percent but per capita demand will decline by 27 percent


60

DEMAND for FARM PRODUCTS for NON-FOOD or FEED

USESMany agricultural products are used not only for food and feed but forindustrial purposes such as starch fiber and energy In recent yearsfoods crops such as maize soybeans and sugarcane have increasinglybeen diverted to production of bio-fuels such as ethanol and bio-dieselAs the demand for these energy products grows it competes directlywith the demand for food and feed driving up the overall demand(and prices) for farm products as growth in supply has not been able tokeep up with growth in overall demand and the supply of agriculturalproducts for food and feed is diverted to bio-fuels

Demand for bio-fuels has grown because the demand for en-ergy has risen due to population and income growth around theworld while energy mdash primarily oil and gas mdash supplies have notgrown as rapidly thus driving up the price of energy products Tech-nology to produce ethanol and biodiesel has improved over time sothat the net energy balance (energy used to produce as compared toenergy obtained from a gallon of bio-fuel) has become more favor-able reducing the cost of supplying bio-fuels Governments led bythe United States and Brazil have also subsidized research on andproduction of bio-fuels

At any given time speculators are also in the market driving pricesup or down as they make bets on the future supply and demand situa-tions for energy products Due to speculation and uncertainty pricesmay rise above or drop below the level that fundamental supplyand demand factors would dictate they should be However prices

Table 3-3 Comparison of Growth of Demand for Agricultural

Goods Hypothetical Cases

Levels of Rate of Rate of Income RateDevelopment population per capita elasticity of growth

growth income growth of demand of demand

Very low income 25 0 10 25Low income 30 10 09 39Medium income 25 40 07 53High income 20 40 05 40Very high income 10 30 02 13

Adapted from John W Mellor Economics of Agricultural Development (Ithaca NYCornell University Press 1966) p 78


61

eventually adjust (and remove over-adjustment) as new informationbecomes available A good example is the price patterns for maize ricesoybeans and other basic cereals in 2007ndash2008 Grain prices rose sharplyin those years after being relatively constant for several years Funda-mental demand forces mdash such as increased population and incomes inseveral countries and increased demand for bio-fuels mdash combined withsupply factors such as slow growth in productivity higher input costsand poor weather in major producing countries to drive up grain pricesHowever prices were driven even higher than they would have beenotherwise for several months due to speculation In the section belowwe examine further how demand and supply factors interact to deter-mine price

INTERACTIONS between DEMAND and SUPPLYIf markets operate freely with numerous buyers and sellers supply in-teracts with demand to determine the quantity supplied and demandedas well as the price Market supply is defined as the amounts of a prod-uct offered for sale in a market at each specified price during a speci-fied period of time (see Fig 3-3)

A given supply curve assumes that the following factors are heldconstant (1) technology of production (the way the good is produced)(2) prices of inputs used in production (3) prices of products that maybe substituted in production and (4) number of sellers in the marketChanges in these factors can cause the supply curve to shift inward oroutward For food as a whole changes in technology are a major factorcausing shifts in supply over time A new technology that lowers thecost of production will shift the supply curve downward to the right(such as from supply curve 1 to supply curve 2 in Fig 3-3)

Price and Policy ImplicationsThe rate of growth or decline in agricultural prices over time dependsin large part on the net effects of supply and demand shifts (see Figure3-4) Because of outward shifts of the demand curve caused by popula-tion and income growth it is unlikely that agricultural prices will expe-rience major declines resulting from supply growth in a country dur-ing the early stages of development12 If the supply curve for food shiftsout very little population- and income-driven demand growth could

12 However there may be substantial local or regional variation (see Box 3-2) andagricultural prices in a country may go up or down as well due to changes insupply and demand in international markets


62

Figure 3-3 Hypothetical supply curve for a commodity An increase in theprice of the commodity all other things being equal will cause a movementalong a supply curve say from point A to point B and an increase in quantitysupplied Changes in the determinants of supply mdash technology input pricesother output prices number of sellers mdash can cause a shift in the supplycurve say from A along supply curve I to Arsquo along supply curve 2 or viceversa if there is a worsening of productivity

lead to price increases especially if a country has isolated its marketsfrom world markets However these increases are likely to be smallbecause of the close relationship between agricultural productiongrowth and income growth during early stages of development Asnoted earlier it is difficult to get large increases in income and there-fore effective demand without corresponding increases in agriculturalproduction

Other important determinants of the effect of supply and demandshifts on agricultural prices are the elasticities of supply and demandThe more elastic the supply curve (roughly the flatter it is in Figure 3-4) the less prices will change as demands grow Open economies (thosewhere imports and exports are common) tend to be characterized by


63

Figure 3-4 Hypothetical supply and demand curves for a commodityChanges in determinants of demand mdash for example income and populationmdash can cause a shift in demand while changes in the determinants of supplymdash for example technology mdash can cause a shift in supply When both areshifting whether the net effect is a price increase or decrease (whether A ishigher or lower than C) depends on the relative size of shifts of supply anddemand and the slopes of the curves

more-elastic commodity supplies One means of minimizing demand-induced price increases is to permit food imports Another is to in-crease the responsiveness of the food production sector Howeveropen economies are also susceptible to sizable price swings if changesin supply and demand occur elsewhere in the world These implica-tions are examined in greater detail in Chapters 16 and 17

The expected relative stability in food prices during the early stagesof development (except as prices are affected by short-run phenomenasuch as weather or by international forces) implies a need to place em-phasis on policies to shift out the agricultural supply curve and to raiseincomes rather than on pricing policies Thus the focus of public in-vestment needs to be where the return is highest whether it is inside oroutside agriculture Because it is difficult to increase incomes of the


64

poor without increasing employment the country may need to focusinvestments on labor-intensive commodities and industries

As development proceeds incomes grow and demand shifts out-ward the possibilities for rapid increases in food prices arise even incountries experiencing rapid growth in agricultural production Thereasons for this were discussed earlier and illustrated in Table 3-3Middle-income countries experiencing rapid rates of income growthare likely to need increased agricultural imports

Eventually when high income levels are reached income elastici-ties of demand for food and population growth rates become smallerThese small income elasticities relieve the upward pressure on foodprices but create the potential for food surpluses and low farm pricesPolicies at this stage tend to be concerned with easing the cost of adjust-ing large portions of the labor force out of agriculture directing pro-ducers into those commodities for which the country has a relative ad-vantage in world markets and stabilizing domestic farm prices which

BOX 3-2

MARKETS and REGIONAL PRICE VARIATIONDeveloping countries are often characterized by poor transportation sys-tems sparsely populated areas or isolated pockets of high population den-sities and limited means of knowing what economic conditions exist in theseisolated regions Because of these factors regional food markets tend tobe isolated and independent Prices can vary widely from region to regionwith little relationship to average national prices and quantities or to thoseprices prevailing in markets in large cities In addition local prices tend tobe more variable than national prices since with few market participantschanges in behavior by small numbers of participants can affect prices

The consequences of these market problems can be high regionalfood prices and less ability to meet consumption needs for given incomesHigh price variability causes uncertainty to producers and consumers ofthe products These factors worsen national welfare and can cause iso-lated pockets of poverty Increases in national supply will do little to im-prove such situations

Regional supply differences caused by high marketing costs due topoor transportation systems can only be lowered by improvements in infra-structure and market information Poor information causes these differ-ences when costs associated with gathering price and demand informa-tion impairs the effectiveness of the marketing system Measures to en-hance information flows include collection and dissemination of market-related information and telecommunications systems to transmit the infor-mation


65

tend to be more heavily influenced by swings in international pricesnow than they were in the past

The existence of structural changes in the market for agriculturalgoods over time suggests a strong need to tailor development policiesto each countryrsquos stage of development It also suggests a need for eachcountry to consider the stages of development of other countries in theworld and changes in energy markets when making projections aboutfuture demands for agricultural products

SUMMARYThe effective demand for food is determined by the physical and psy-chological need for food combined with the ability to pay for it De-mand is influenced by prices population income and preferences Thelevel of per-capita income is a major determinant of food demand inlow-income countries The income elasticity of demand for food variessystematically by income level by commodity and by places and so-cioeconomic groups within a country The income elasticity of demandfor food declines as development proceeds and shifts in consumptionoccur away from starchy staples toward higher-protein foods Own-and cross-price elasticities of demand are useful for projecting demandchanges Several procedures are available for obtaining income and priceelasticities Middle-income developing countries generally experiencethe most rapid rates of growth in demand for food Changes in energymarkets have added an additional factor to consider when projectingfood price changes

IMPORTANT TERMS and CONCEPTSAggregate versus household data Income effectBennettrsquos law and why it holds Income elasticity of demandBio-fuels Law of demandContradictory role of agricultural Major determinants of long-run prices price trendsCross-price elasticity of demand Normal superior and inferiorCross-sectional versus time-series goods data One-price elasticity of demandEconometric model State of developmentEffective demand Substitutes of complementsElastic versus inelastic demands Substitution effectEngelrsquos law and why it holds SupplyFactors that shift the demand curve Use of aggregate versus houseFactors that shift the supply curve hold-level dataHomogeneity condition and its use


66

Looking AheadRapid population growth over the past few years has dramatically in-creased the worldrsquos population and made the task of raising per capitaincome and reducing hunger in some countries more difficult Popula-tion growth is influenced by many factors and several policies havebeen tried or suggested for controlling it In the next chapter you willlearn about population growth including implications for food con-sumption and natural resource use You will examine population pro-jections and policies for the future

QUESTIONS for DISCUSSION1 As incomes increase do people spend greater smaller or the same

proportion of their income on food2 Distinguish between an income elasticity of demand and a cross-

price elasticity of demand3 What tends to happen to the income elasticity of demand for food

as the per-capita income of a nation increases Why4 To estimate the effect on the calorie and protein intake of a popula-

tion resulting from a decrease in the price of rice why is it impor-tant to know something about the cross-price elasticities of de-mand between rice and other major foods in the country

5 Assume the price elasticity of demand for eggs in India is ndash075 Bywhat percentage would the price of eggs have to change to increaseegg consumption by IS percent

6 Do you expect the price of food in the world to be higher or lower10 years from now To answer this question draw a graph withsupply and demand curves and show how you expect the curves tochange over time and why

7 If population is growing at 26 percent per year the income elastic-ity of demand for food is 06 and per-capita income is growing at 4percent per year what would be the growth in demand for foodper year assuming prices remain constant

8 What tends to happen to the mix of foods consumed as per-capitaincome in a country increases Why

9 If agricultural development is successful at increasing the level ofper-capita food production in several less-developed countriesover the next 10 years why might these same countries becomeless self-sufficient in food (have to import more food than before)during that period of time


67

10 Assume you have the following cross-price elasticities for aparticular country

Commodity Cross-price elasticity

Rice and beans ndash 035Rice and wheat 040Rice and chicken ndash 010Rice and milk ndash 005Rice and other goods 0

a You are a planner for the country represented above andyou want to raise the consumption of rice by 6 percent toimprove calorie intake of the population The incomeelasticity of demand for rice is 04 Use the informationabove and the homogeneity condition to determine thenecessary percentage change in the price of rice

b If rice consumption increases by 6 percent what else besidesthe calories obtained from rice would you need to considerwhen assessing the impact on calorie consumption

11 What distinguishes the need for food from the effective demandfor food

12 Which of the following factors shift primarily the demand curveand which factors shift primarily the supply curve per capitaincome changes new technologies population growth tastes andpreferences prices of inputs used in production prices of othergoods consumed prices of substitute goods in production

13 Why is there a close relationship between agricultural productiongrowth and a nationrsquos income growth during the early stages ofdevelopment

14 Even if agricultural production increases rapidly why is it un-likely that countries in early stages of development will experi-ence major price decreases as a result

15 Why do middle-income countries experiencing rapid rates ofgrowth in food production often need food imports while verypoor countries that are experiencing slower rates of food produc-tion growth do not


68

RECOMMENDED READINGSFoster Phillips and Howard Leathers The World Food Problem (Boulder

Colo Lynne Rienner 1999) Chapter 8Mellor John W Economics of Agricultural Development (Ithaca NY

Cornell University Press 1966) Chapter 4Runge C Ford C Benjamin Senauer Philip G Pardey and Mark W

Rosegrant Ending Hunger in Our Lifetime (Baltimore Johns HopkinsUniversity Press 2003) pp 39ndash56

von Braun Joachim Rising Food Prices What Should be Done IFPRIPolicy Brief April 2008 httpwwwifpriorgpubsbpbp001pdf


69

CHAPTER 4

Population

When poverty is tied to rapid population growth rates (as it generallyis) the risk of widespread hunger is ever present

mdash Runge Senauer Pardey and Rosegrant1

THIS CHAPTER1 Presents basic facts about the distribution of the worldrsquos popula-

tion the rate of population growth and the consequences of rapidpopulation growth

2 Explains the determinants of population growth and policies thatcan affect that growth

3 Examines causes and implications of migration from rural to urbanareas

BASIC FACTS about POPULATION GROWTHThe human race dates back about 3 million years During more than 99percent of this time there was virtually zero population growth Aver-age life expectancy was 20 to 25 years and world population probablynever exceeded 10 million people After agriculture replaced huntingand gathering of food around 6000 to 8000 BC population began togrow more quickly because larger numbers of people could be sup-ported by food production By the year 1 AD there were about 300million people and by 1650 500 million

Population began to grow more rapidly during the industrialrevolution in the eighteenth century and really accelerated afterWorld War II when populations in developing countries began togrow dramatically World population reached 1 billion around 1800

1 C Ford Runge Benjamin Senauer Philip G Pardey and Mark W Rosegrant EndingHunger in Our Lifetime Food Security and Globalization (Baltimore Johns HopkinsUniversity Press 2003) p 21

70

2 billion in 1930 and 3 billion in 1960 It grew to 4 billion in 1975 5billion in 1986 6 billion in 1999 65 billion in 2006 and will exceed 7billion around 2013 based on projected future growth rates (see Figure4-1) The rate of population growth in the world peaked at 20 percentper year in 1965 and has declined since then to its current (2009) rate ofabout 12 percent However population itself will continue to grow formany years since the future number of parents will be much larger thanthe current number because of the rapid population growth in the re-cent past

Distribution of the World PopulationThe worldrsquos population is distributed unevenly across the globe re-flecting the degree to which each location attracted migrants andwas able to sustain growth in its local population over time Theearliest human ancestors lived in Sub-Saharan Africa and migratedfrom there to other regions By far the greatest accumulation of popu-lation has occurred in Asia which holds over 60 percent of the worldrsquospopulation and has the highest population densities Large populations

Figure 41 Past and projected world population 1750 to 2150 mediumestimate (Source Population Division of the Department of Economic andSocial Affairs of the United Nations Secretariat World Population Prospects

The 2004 Revision)


71

are also found across Europe along the coasts of North and SouthAmerica and within Africa

The current size and density of the ten most populous countriesare shown in Table 41 The list is dominated by China and India butseveral other Asian countries have large populations and also have veryhigh density with more than 100 people per square kilometer Thesecountries account for the bulk of historical population growth Todaypopulation growth in Asia and elsewhere has slowed and the fastestgrowing countries are mainly in Sub-Saharan Africa (Table 4-2) Theten fastest growing countries are all in Africa with annual rates of popu-lation increase at or above 30 percent per year Such rapid growth isalmost unprecedented in human history It is occurring in the worldrsquospoorest places where purchasing power per capita is below a dollar aday and it is often occurring in places where rapid population growthis a fairly recent phenomenon At the other end of the spectrum theslowest-growing countries and presented in Table 42 Some of thesecountries are actually losing population Countries that have negativepopulation growth rates are mainly the former socialist countries ofEastern Europe but also include some high income countries in Eu-rope (Germany and Portugal)

Table 4-1 The Worldrsquos Most Populous Nations

Mid-2008 population Population densityNation (millions) (peoplekilometer)

China 1325 139India 1149 350United States 305 32Indonesia 240 126Brazil 195 23

Pakistan 173 217Nigeria 148 64Bangladesh 147 1023Russia 142 8Japan 128 338

Total (10 nations) 3952Total (world) 6705 49

Source Population Reference Bureau Inc 2008 World Population Data Sheet

CHAPTER 4 mdash POPULATION

72

Table 42 Population Growth Rates in the Worldrsquos Fastest and

Slowest Growing Nations (with 7 Million or More Population)

Fastest growing Annual growth rate Mid-2008 population nations (percentage 2008) (millions)

Mali 33 127Malawi 32 136Yemen 32 222Niger 31 147Uganda 31 292

Dem Rep of the Congo 31 665Benin 30 93Burkina Faso 30 152Burundi 30 89Guinea 29 103

Slowest growing Annual growth rate Mid-2008 population nations (percentage 2008) (millions)

Ukraine ndash 06 462Bulgaria ndash 05 76Hungary ndash 04 100Serbia ndash 04 74Russia ndash 03 1419

Belarus ndash 03 97Romania ndash 02 215Germany ndash 02 822Portugal ndash 00 106Poland 00 381


Consequences of Rapid Population GrowthRapid population growth is a problem for most developing countriesmainly because it changes the age composition of the country with alarger fraction of the population being children Population growthmainly takes the form of a rising number of children and young peoplewhich imposes a strain on the natural resource base increases pres-sures for jobs reduces food production gains per capita contributes topollution and strains the capacity of schools and other social servicesWhile it would be an over-simplification to say that population growthis the root cause of natural resource problems unemployment and soforth it certainly intensifies these problems


73

Fig

ure

4-2

P

op

ula

tio

n g

row

th r

ate

s (

pe

rce

nt)

2

00

7 (S

ou

rce W

orl

d B

an

k W

orl

d D

eve

lop

me

nt In

dic

ato

rs o

n-l

ine

da

tab

ase

)


74

Figure 4-3 Population Profiles Growth and Momentum The age distributionof the people in a country has a major impact on the future rate of growth ofits population The population pyramid is a tool that demographers use to de-scribe this distribution Shown above are two population pyramids reflectingdiffering rates of current and future population growth The broad base onthe Congo pyramid means that there is population growth momentumwhich will cause population to grow even if fertility or the number of childrenthat each family has slows immediately to replacement levels As the largenumber of people in the younger age groups in Congo reach child-bearingage the number of births will rise dramatically even if the number of birthsper couple falls The United States has a relatively even age distribution andis unlikely to experience a large increase in population (Source US CensusBureau 2005)

Differences in age structure associated with different rates of popu-lation growth are illustrated in figure 4-3 Those with rapid growth havelarge numbers of very young children relative to working-aged peopleThis high dependency causes increased current consumption and re-duced savings and investment The impacts of rapid population growthon schooling can be particularly important Since about 25 percent ofthe people in developing countries are of school age compared to 15percent in typical developed countries equal amounts of budget out-lay for education translate either to low expenditures per pupil or lowenrollment rates Inadequate investments in either physical or humancapital will hurt the long-run possibilities for development


75

The argument that most countries need more population to pro-vide labor and markets is not very compelling given the abundance ofunskilled labor relative to capital in many countries and the fact thatincreased consumption of manufactured goods is heavily dependenton per-capita income growth

Hunger famine and poverty were serious problems long beforepopulation began its rapid rise However the population explosion hasmade it difficult for some countries to invest and has magnified thelack of social justice in others

CAUSES of FERTILITY CHANGE and POPULATION

GROWTHPopulation growth occurs for the world as a whole when births exceeddeaths2 Years ago births and deaths were both high on the order of 40to 50 every year per 1000 people in the population About half of thedeaths occurred before age ten and death rates fluctuated from year toyear with contagious diseases and with variations in food suppliesDuring this time population fluctuated but did not grow rapidly forany sustained period of time

Sustained population growth began in Europe and other now-in-dustrialized regions during the eighteenth century with a slow butsteady decline in the death rate Technological and economic progressresulted in improved nutrition and health which reduced infant deathsand extended life expectancy well before scientists or medical doctorsunderstood what caused disease or knew how to cure people once theyfell ill Population growth accelerated as death rates fell with no changein the birth rate for about one hundred years until the late nineteenthcentury when birth rates began to fall as women delayed marriage andhad fewer children (see Figure 4-4) Birth and death rates declined intandem until the 1950s when death rates stabilized and the total popu-lation growth rate slowed It took roughly 200 years for the now-indus-trialized countries to transition from high birth and death rates in theearly eighteenth century to low birth and death rates in late twentiethcentury During this period births exceeded deaths by about 10 per1000 people for a population growth rate on the order of 1 percent peryear

In contrast todayrsquos less-developed countries experienced no sig-nificant decline in mortality until the twentieth century when their deathrates declined more rapidly than they ever had in the now-developedcountries This precipitous drop in the death rate was not due to slow

2 Population in individual countries also depends on immigration and emigration


76

improvements in nutrition and wealth but to the sudden introductionof technological improvements developed through scientific researchOnce scientists and doctors understood the causes of disease and theprinciples of nutrition especially after World War Il countries rapidlydeployed the new antibiotics immunizations and insecticides to con-trol disease-bearing insects They invested heavily in sanitation andmaternal and child health programs After the decline in death rates ittook several decades for birth rates to begin falling mdash but by then thegap between deaths and births was on the order of 20 per 1000 peopleor 2 percent per year and in many countries it was over 3 percent peryear

In summary population growth has been much faster in todayrsquoslow-income countries than it ever was in todayrsquos high-income coun-tries for one reason the low-income countriesrsquo death rates fell fasterdue to the sudden introduction of life-saving technologies It is hard toimagine any serious observer wishing that those techniques had notbeen introduced since they saved millions of lives and made possiblemuch of the population we have today mdash but the speed of introductionmade it relatively difficult for those countries to raise their per-capitaincomes until the transition to lower birth rates could be completed

Figure 4-4 Population growth through natural increase 1850ndash2050 (SourceWorld Bank World Development Report 1980 New York Oxford UniversityPress 1980 p64and UN Population Division World Population Prospects2004 Revision Population Database)


77

The historical demographic transition shown in Figure 4-4 has re-peated itself in country after country Each has a different timing andspeed of transition but all began with high birth and death rates and arelatively stable population size then a decline in the death rate thatinitiates population growth For those countries that have completedthe demographic transition a decline in the birth rate has followedclosing the gap between birth and death rates and stabilizing the popu-lation size at a new higher level

The fact that this demographic transition has been observed inmany countries in the past does not of course guarantee that it will beobserved in the future If population growth outstrips societyrsquos re-sources death rates could rise again and indeed in much of Africa theyalready have due to the ravages of HIVAIDS as well as continuedhigh levels of child malnutrition and disease To understand where andwhen the demographic transition can be completed without rising deathrates we need to examine the causes of fertility (birth rate) changes andconsider policies that might influence those changes

Causes of Fertility ChangesFamily size is largely determined by parental motivation and this mo-tivation reflects rational and in many cases economic decisions Tastesreligion culture and social norms all play a role yet evidence suggeststhat differences in economic factors as well as family planning educa-tion and access to birth control play the major roles Female educationis particularly important in reducing family size

People receive pleasure and emotional satisfaction from childrenThus there is a consumption benefit from having children and in poorsocieties there may be little competition from other consumption goodsIt costs time and money to raise children but these costs (both out ofpocket and in terms of earnings foregone while caring for children) maybe relatively low especially in rural areas

Children are also an investment This investment value increasesthe benefits associated with having children They frequently workduring childhood In rural areas they gather firewood collect waterwork in the field move livestock and do other chores In urban areas achildrsquos ability to contribute work to the family is more limited how-ever income opportunities exist for very young children in urbanareas of most less-developed countries (LDCs) An important sourceof urban employment of children is the ldquoinformal sectorrdquo often in pettytrading and services When older children leave home especially if theygo to the city they may send cash back home Children also provide


78

Child weeding onions in the Philippines

security during old age Most less-developed countries have no socialsecurity system These benefits from additional children raise the num-ber of desired children in less-developed countries especially amongpoor families In many countries child mortality is high so that extrabirths may be necessary to ensure that the desired number childrensurvive All these factors increase birth rates

As people obtain more education and earn more money they de-lay marriage and have fewer children Parents have more options andcome to prefer keeping their children in school rather than earning in-come from childrenrsquos work An increase in per-capita income is inher-ently a rise in the value of time A rise in the value of time particularlyif women have expanded employment opportunities outside the house-hold creates strong incentives to have fewer children and to invest morein the health and education of each child

Thus poverty and high fertility are mutually reinforcing Socialand economic factors such as income literacy and life expectancy ac-count for as much as 60 percent of the variation in fertility changesamong developing countries The strength of family-planning programsalso accounts for a significant share

Birth rates do not decline immediately when incomes begin to in-crease Expectations about desired family size may take years to evolve


79

and in any case they will change at different rates for different socialgroups Within each country people with fewer opportunities mdash espe-cially fewer opportunities for women mdash will often continue to havehigher birth rates than other groups further slowing the transitionAnd of course the speed of reduction in birth rates depends on theavailability of effective family-planning techniques To reduce fer-tility households must both want to reduce their total family sizeand be able to control the number and timing of births through effec-tive contraception

Policies That Influence Population GrowthVirtually everyone favors public and private actions to reduce deathrates but measures to reduce birth rates are more controversial Thecontroversy arises because some question the cost-effectiveness of familyplanning programs and others find efforts to control fertility in conflictwith their strongly held values and beliefs Family-planning programsin at least one country appear to have been coercive and some arguethat more people are needed to provide labor and domestic markets

Those who call for public actions to help curb birth rates arguethat public costs (schools hospitals pollution etc) associated with largefamilies exceed social benefits Therefore society has a right to at leastinform its citizens of ways to control births Evidence from countriesthat have had strong family-planning programs such as Colombia andIndonesia shows that these programs can be effective3

China combined educational programs social pressure and eco-nomic incentives to reduce rates of birth These were effective but manypeople consider Chinarsquos family planning program too strong theyparticularly object to the use of abortion to control family size Thesecritics can point to less-coercive educational programs that appear tohave been equally effective in Sri Lanka in parts of India and in othercountries

Measures to improve income growth and distribution developsocial insurance and pension programs and expand education andemployment opportunities for women are all likely to help reduce birthrates These efforts take time however which is why the policy debateoften centers on family planning issues Increased populations makeall these programs more expensive and difficult to implement so thatcurrent investments in family planning will save money in the long

3 World Bank World Development Report 1984 p 9


80

run Most people in developing countries consider the fertility rates intheir countries too high and only a few consider them too low4

Future Population ProjectionsThe United Nations has projected that by the year 2050 world popula-tion will have grown to around 9 billion people5 Projections vary how-ever from 78 billion to 108 billion due to the uncertainty in factorsaffecting the projections (see Figure 45) Most of the growth will beconcentrated in the developing countries Future population projectionsare uncertain because they depend on income increases educationalimprovements family planning programs and the future progressionof the AIDS epidemic that are hard to predict If present trends in growthrates continue however the middle estimate appears the most likely

URBANIZATIONRegardless of the total increase in population it is clear that urbaniza-tion will continue at a rapid pace and that by the year 2050 the worldwill be substantially more urban While total population in developing

Figure 4-5 Future population projections (Source United Nations WorldPopulation Prospects The 2006 Revision)


4 The Hunger Project Ending Hunger An Idea Whose Time Has Come (New York Praeger1985) p 30

5 United Nations World Population Prospects the 2002 Revision (New York United Na-tions 2003)

81

countries grew roughly 2 percent annually from 1993 to 2008 urbanpopulation grew at an annual rate of more than 3 percent Natural popu-lation increases in urban areas account for about 60 percent of thisgrowth rate and another 8 to 15 percent is attributable to reclassifica-tion of rural areas to urban areas At least 25 percent of the rapid growthin urban areas is caused by migration from rural to urban areas Be-cause a large proportion of the migrants are of child-bearing age a siz-able part of the ldquonatural increaserdquo in urban populations also can beattributed to recent migrants The percentage of urban populationgrowth due to migration is highest in those countries in the early stagesof development

Causes of Rural-to-Urban MigrationRural-to-urban migration is in a broad sense a natural reflection of theeconomic transformation from agriculture to industry that economiesundergo during the development process As we discuss in Chapter 5the process of industrialization increases the demand for labor in themanufacturing and service sectors In the early stages of developmentmuch of this labor must come from the rural areas

By and large people move to urban areas because they expect in-creased economic opportunities in terms of both employment earningsand access to goods or services produced by others Landlessness andrural poverty natural calamities lack of educational opportunitiesunequal public services provision and other factors come into play aswell Although living costs are higher in urban areas migrants aresearching for a better level of living they are pushed out of rural areasby poverty and desperation and pulled to the cities by hope and op-portunity

The vast majority of people who migrate to cities perceive that thebenefits of the move exceed its costs (these costs include foregone ruralincome and the cost of the move) or they would not make the moveMigrants tend to be young disproportionately single and better edu-cated than the average of those left behind The first two of these char-acteristics tend to lower the costs of the move while the third raises thebenefits Better-educated people can expect higher returns from theireducation (wages) in urban areas Most migrants to large cities in de-veloping countries have relatives or friends already living there a factthat tends to lower the cost of the move

Rural-to-urban migration has been persistent despite rising un-employment rates in urban areas The likely reasons for this persistenceare that workers consider both rural-urban wage differentials and the


82

Many of the migrants in Dhaka Bangladeshseek work as bicycle rickshaw drivers

probability of obtaining a job (which is often much less than 100 per-cent) and still perceive that they will be made better off by movingMany of these migrants realize it is unlikely that they will obtain a high-paying or ldquoformalrdquo job immediately but they are willing to work inlow-paying jobs such as selling goods on street corners ldquowatching overrdquoparked cars or doing other jobs in the ldquoinformalrdquo sector For some ofthese migrants these high-paying jobs may come only to their childrenand then only if the children receive a better education than their par-ents had

The importance of educational opportunities and other public ser-vices cannot be overlooked as reasons for rural-to-urban migration Inmany countries an urban political bias has created a large disparitybetween the levels of services including quality of public education inrural and urban areas Furthermore and perhaps more important thepolitical bias extends to economic policies such as pricing policies Foodprices are often kept artificially low (through policies discussed later inthis book) This policy helps urban consumers but discourages invest-ment in food production and lowers incomes in rural areas These dis-tortions help explain some of the attractions of cities

Consequences of Rural-to-Urban MigrationUrbanization per se is not a problem There are economies of scale re-sulting from the concentration of suppliers and consumers for industry


83

and public services Innovative and knowledge-intensive industries aremore likely to form and prosper in high population-density areas Theproblem arises when cities become ldquotoo large too quicklyrdquo often be-cause rural-to-urban migration increases the urban population at a ratefaster than industry schools sewage systems and so forth can expandThe result is substandard housing poor sanitation and lack of otherservices for recent migrants (see Box 4-1) While migrants have beenshown to be assets to the cities the shanty towns that surround almostall large cities in less-developed countries attest to the growing dispari-ties that occur within cities if urbanization occurs too rapidly Manypeople live in absolute squalor often without sewage systems and some-times in garbage dumps The fact that people are willing to live in theseareas highlights the poverty and lack of opportunity in rural areas

Evidence suggests that farm output has not been affected greatlyby the loss of migrants and their labor to urban markets In most low-income countries the number of farmers keeps rising despite rural-ur-ban migration because the total population is growing faster than cit-ies can expand And migrants help sustain their relatives on the farm

BOX 4-1

MEXICO CITY AN EXAMPLE OF RAPID URBAN GROWTHThe situation in Mexico City whose population more than tripled over thepast 25 years is an example of some of the strains imposed by rapid ur-banization The growth of Mexico City outstripped the growth in the avail-ability of services The city opened an ultramodern subway system in 1969began large-scale construction of housing in the early 1970s and inaugu-rated a deep-drainage sewer system that was hailed as an engineeringmarvel in 1975 Now however the subway and other transportation sys-tems are hopelessly overloaded Thirty percent of the families in the citylive in single rooms and fully 40 percent of houses lack sewerage Con-gestion and air pollution are severe water is pumped into the city from asfar away as 50 miles rainwater and sewage are pumped out The sewersystem is so overtaxed that sewers back up and overflow into the streetsduring downpours The cityrsquos garbage dumps are overflowing and thou-sands earn their livelihood by picking garbage at the public dump

Rural-to-urban migration continues in spite of these problems withabout 400000 rural Mexicans moving to Mexico City each year The hopeof a better life provides a strong pull While roughly 23 percent of thecountryrsquos population lives in the city 40 percent of the GDP is producedthere and more than one-third of the factory and commercial jobs is lo-cated in the capital Rural Mexico is very poor with high rates of malnutri-tion low literacy and poor services even compared to the capital


84

when they remit money back to rural areas However some ruralareas have suffered because the brightest and most educated work-ers have migrated

Governments have employed many approaches to the task of slow-ing down rural-to-urban migration Some countries are restricting mi-gration implementing resettlement schemes and providing servicesto smaller towns and cities It appears however that unless the urbanbias in economic policies is removed and economic development pro-ceeds to the point where living conditions improve in rural areas ru-ral-to-urban migration will continue in many countries at a very fastrate

SUMMARYThe current world population of more than 67 billion is growing at anannual rate of 12 percent an extremely high rate by historical stan-dards The developing world is experiencing a population explosioncaused by rapid decline in death rates due to improved health and nu-trition While birth rates have begun to decline due to higher incomesfamily planning education and other factors world population is likelyto continue to grow for more than a century Effective measures to con-trol population growth should consider the economics of fertility andhow different economic and social policies affect childbearing decisionsRural-to-urban migration is proceeding at a rapid rate in many devel-oping countries as migrants seek to achieve higher standards of livingRapid urbanization has caused a strain on public services pollutionand other problems

IMPORTANT TERMS and CONCEPTSBirth rates and death rates Family planningCauses of fertility changes Population densityCauses of rural-to-urban migration Population distributionCharacteristics of migrants Population growthConsequences of rapid population Rural-to-urban migration growth Urban political biasDemographic transition Why death rates decline

Looking AheadThis chapter concludes our overview of several dimensions of the worldfood- income-population problem Hunger and development problemsare both severe and complex We move now to a set of two chapterswhich examine economic theories that have been used in attempts toidentify the heart of the development process We begin in the next


85

chapter with a discussion of important factors related to productiongrowth Subsequent chapters then incorporate these factors into devel-opment theories

QUESTIONS for DISCUSSION1 Has population increased at a fairly constant rate since prehistoric

times2 What is the current world population and how fast is it growing

When will it stop growing3 At present growth rates how long will it take to add 1 billion

people to the world population4 Why is population increasing more rapidly today in LDCs than it

did during early stages of development in Europe and the UnitedStates

5 What are the major determinants of birth rates in LDCs6 What are the impacts of rapid population growth7 What policies can be used to help reduce population growth8 Are population growth rates more likely to increase or decrease

over the next 15 years9 Which are the fastest and slowest growing countries in the world

(in terms of population)10 What proportion of the worldrsquos population lives in Asia11 Why are we seeing rapid rural-to-urban migration in many

developing countries12 What are the consequences of rapid rural-to-urban migration13 Describe the characteristics of the most common type of migrant14 How can high fertility be viewed as a consequence of poverty as

well as a cause of it15 Describe the demographic transition that tends to occur as

development takes place and why it occurs

RECOMMENDED READINGSGelbard Arlene Carl Haub and Mary M Kent ldquoWorld Population

Beyond Six Billionrdquo Population Bulletin Volume 54 No1 PopulationReference Bureau March 1999

Population Reference Bureau httpwwwprborgPopulation Reference Bureau httpwwwprborgPublications

Datasheets20082008wpdsaspxUnited Nations Department of Economic and Social Affairs Population

Division World Population Prospects The 2006 Revision HighlightsWorking Paper No ESAPWP202 2007


86

87

PART 2

Development Theories

and the Role of Agriculture

Rice in Peru

88

PART 2 mdash DEVELOPMENT THEORIES AND THE ROLE OF AGRICULTURE

89

CHAPTER 5

Economic Transformation

and Growth

Economic growth depends ultimately on the impact of productiveresources and the efficiency with which they are used

mdash Angus Maddison1

This Chapter1 Describes the economic transformation that occurs with economic

development involving a decline in the size of agriculture relativeto non-agricultural activities

2 Introduces the concept of a production function and the law ofdiminishing returns

3 Identifies potential sources of economic growth

THE ECONOMIC TRANSFORMATIONEconomic growth is almost always accompanied by an economic trans-formation from agriculture into other activities As the economy expandsthe agricultural sector grows more slowly than manufacturing and ser-vices and agriculture accounts for a declining fraction of employmentoutput and consumer expenditures The transformation from farm tonon-farm activities as incomes rise applies to regions countries andthe world as a whole It is among the most dependable relationships inthe world economy and has major effects on peoplesrsquo lives This chap-ter explores its causes and its consequences both within agricultureand for society as a whole

The tendency for richer countries to derive a smaller share of theirincome from agriculture is shown in Figure 5-1 and their tendency to have

1 Angus Maddison Economic Progress and Policy in Developing Countries (New York WW Norton and Co 1970) p 34

90

a smaller share of total employment in agriculture is shown in Fig 5-2These two figures show remarkable similarity and an interesting dif-ference The similarity is the clear downward trend All poor countriesderive a significant share of their income from agriculture while allrich countries derive only a small fraction from it Note that agriculturenever disappears entirely in the rich countries and there is wide varia-tion in its share among the poorest countries A key difference betweenthe two figures is that in poor countries agriculture accounts for a largerfraction of employment than of output Roughly speaking countriesbelow $1000 per year in per-capita income have 40-90 percent of theworkforce engaged in agriculture and these people earn 20ndash50 percentof their countryrsquos total income In other words within poor countrieson average each farmer earns roughly half of what non-farmers earn

Causes of the Economic TransformationIn low-income countries labor productivity is low and people out ofnecessity spend a high proportion of their income on food Labor andsmall amounts of land are their primary assets and many have nochoice but to devote at least some of their labor to farming to feedthemselves and their family Many low-income farmers are actually

Figure 5-1 Agriculturersquos share of total output and Gross National Income2007 (Source World Bank World Development Indicators on-line database)


91

Figure 5-2 Agriculturersquos share of total employment and Gross NationalIncome 2005 (Source World Bank World Development Indicators on-linedatabase)

net food buyers using small amounts of non-farm income or the sale ofhigh-valued crops and livestock to supplement the basic foods theygrow on the farm To emerge from poverty these semi-subsistence farm-ers must improve their productivity either on the farm or in non-farmactivities

As the productivity of labor and other factors increases four ma-jor factors drive the transformation from farm to non-farm activitiesThe first factor is that incomes rise due to the productivity increasecausing a gradual shift in demand from food to non-food items Thisconsumption shift occurs primarily because the income elasticity ofdemand for food is less than 10 and tends to decline as income growsDeclining income elasticities mean that for each percentage increase inincome progressively lower proportions are spent on food (see EngelrsquosLaw in Chapter 3) These changes in demands for agricultural and non-agricultural products imply that as development proceeds relativelymore labor inputs and other resources are devoted to non-agriculturalactivities

The second factor driving the transformation is that at any givenincome level the quantity of food demanded changes relatively littlewhen its price changes In other words the price elasticity of demand

CHAPTER 5 mdash ECONOMIC TRANSFORMATION AND GROWTH

92

for food is low less than 10 in absolute value and it may be even smallerat higher levels of income This ldquoprice-inelasticrdquo aspect of food demandmeans that if agricultural productivity grows prices received by farm-ers will fall by a higher percentage than the quantity demanded risescreating incentives to remove resources from farming and transfer themto non-farm activities

These two ldquodemand-siderdquo drivers cannot explain the transition insettings where farmers are selling their produce at prices that are deter-mined in a world market In those cases prices received by farmersdepend little on local demand so there must be ldquosupply-siderdquo explana-tions for the transformation as well

A third supply-side factor driving transformation is specializa-tion Even if the mix of activities in the economy remains the sameduring economic growth the availability of capital and market oppor-tunities allows people to expand production of what they do best andthen trade with others for the products they want to consume Thusfarmers produce less of their own food clothes furniture and so forthand an increasing share of these kinds of activities is re-classified fromldquoagriculturerdquo to ldquoindustryrdquo

Another supply-side factor that could drive transformation is thefact that land supply is fixed while other forms of capital can expandAs people accumulate savings from year to year they find fewer andfewer opportunities to add resources to their farms and so prefer toinvest their savings in non-farm enterprises For example the farmerwho already has good buildings fencing livestock and equipment willtend to invest her savings in something else such as a retail trade orservices

Does Agriculture Actually ShrinkThe fact that having higher incomes leads to a smaller fraction of out-put and employment in agriculture does not mean that the absolutesize of the farm sector declines Indeed as countries get richer the levelof farm production and consumer expenditure on farm goods usuallykeeps rising and in countries with rapid farm productivity growthoutput in the sector can grow as fast as non-farm output As agricul-tural productivity and incomes grow labor is gradually transferred fromwork on farms to work in other enterprises Some of this work occurs inthe same rural areas where the farms themselves are located mdash peoplefind employment in small-scale manufacturing in value-added pro-cessing of agricultural products in transport and services etc Othersas noted in Chapter 4 migrate to cities and find work in the formal andinformal sectors


93

In most countries the land area available for farm use is roughlyconstant over time so any change in the number of farm workers trans-lates directly into a change in number of acres available per workerOne might expect economic development to influence the number ofpeople working on each farm and it does but in an unexpected wayAcross countries and over time the number of workers on each farmstays close to the number of workers in the family Family farming domi-nates the sector and so the number of workers per farm varies withfamily size which tends to decline as the economy grows Thus poorcountries may have five to eight workers per farm while rich countriesmay have only one or two but that is mainly because of the decliningnumber of workers per family Furthermore at every level of incomemany family members work only part-time on the farm and hire them-selves out for off-farm work A few do hired farm work but hired work-ers are less common in agriculture than in other sectors

Family workers dominate farming for many reasons but perhaps theprimary reason is that many field operations are difficult to supervise andmonitor and are therefore done better by self-motivated workers Forexample a farm owner would have great difficulty ensuring that a hired

Figure 5-3 Number and average size of farms in the United States 1900ndash2002 (Source Carolyn Dimitri Anne Effland and Neilson Conklin 2005 The

20th Century Transformation of US Agriculture and Farm Policy [WashingtonDC Economic Research Service USDA])


94

worker plows plants or fertilizes appropriately because these opera-tions are dispersed across the field and many other factors intervene todetermine that fieldrsquos eventual yield

Since family farming dominates the sector any change in the num-ber of farm families translates directly into a change in the averagecropped area per farm Figure 5-3 illustrates this process for the UnitedStates The number of farms peaked in the 1920s but as farm labormoved into cities the acreage per farm increased as exiting farmersrented or sold their land to the remaining operators Note that the de-cline in the number of farmers cannot go on forever In the United Statesthere has been no further decline since 1990 with roughly one-third thenumber of farms as there were in the 1910 to 1920 period and farmsizes roughly three times as large

A great deal of variability in farm sizes over time exists acrosscountries Several middle-income countries in Asia are now in a periodof rapid decline in the number of farmers much like the United Statesin the 1960s The poorest countries however have growing rural popu-lations and fixed land bases Many regions in South Asia and Africahave experienced decades of decline in the available acreage per farmersharply reducing their ability to feed themselves or initiate the economictransformation out of agriculture

Implications of Changes in the Number of FarmersThe key fact about the economic transformation presented above is thatas incomes rise the share of agriculture falls but the absolute numberof farmers rises and then falls The initially rising number of farmers inlow-income countries translates directly into rising number of workersper acre of available land If output per acre cannot rise at least as fastas the number of workers output per worker must fall This down-ward pressure on farmersrsquo income accounts for much of the deteriora-tion in social conditions that we observe in the worldrsquos poorest regions

An essential aspect of rural population growth is that it is tempo-rary If economic development continues eventually non-farm employ-ment becomes large enough to absorb all new workers rural popula-tion growth slows and any growth in output per acre translates di-rectly into growing output per worker Many of the people moving offthe farm incur significant adjustment costs during the transition

The fact that an economic transformation occurs with developmentdoes not explain the sources of economic growth and development Un-derstanding those sources of growth and how they contribute todevelopment requires knowledge of a few basic economic principles


95

related to production economics In the next section we introduce a setof principles that can be used to help explain the output and economiceffects of input and technology choices

EXPLAINING PRODUCTION CHOICESEconomic growth requires transforming a countryrsquos basic productionresources into products and doing so in ever more efficient ways Econo-mists have developed ways to characterize how that transformationoccurs utilizing the concepts of a production function a marginal prod-uct and economic optimality These three basic production economic con-cepts are presented here and then used subsequently in models of eco-nomic growth and development

Production FunctionsProduction requires resources or inputs such as labor natural resourcesand tools or other capital items These inputs are often called factors ofproduction Production also requires that these factors be combined bya producing unit that can organize their use to obtain desired goodsand services A description of the way in which factors of productionare combined to produce goods and services is commonly called a pro-duction function A production function describes for a given technol-ogy the different output levels that can be obtained from various com-binations of inputs or factors of production

The relationship between the level of production that can be ob-tained when only one input is allowed to vary (say labor) while allother inputs are held fixed may look something like that shown in Fig-ure 5-4 This relationship is also referred to as an input response curve ora total product curve In the case of labor when no work is done theproduction level is usually zero so the input response curve starts atzero Output may then rise at an increasing rate showing ldquoincreasingreturnsrdquo to each additional unit of input In farming for example theinitial effort of planting is more productive if followed by additionaleffort spent weeding so doubling labor time could more than doublethe resulting output Eventually however all such opportunities willbe exhausted and each additional hour of labor or unit of other inputbegins to offer ldquodecreasing returnsrdquo output continues to rise but at adecreasing rate Finally at very high levels of input use all opportuni-ties to do anything productive may be exhausted and additional inputsmight actually reduce output

On the particular curve drawn in Figure 5-4 the transition fromincreasing to decreasing returns occurs at the input level marked K


96

Beyond that point for each additional unit of labor the additions to out-put become smaller and smaller until eventually at point J additionsto output may stop entirely Beyond that point additional units couldactually reduce output so the curve begins to slope down

The input-response curve in Figure 5-4 shows the productivity ofone input when all the other inputs are held constant Changing thequantity of this one input perhaps labor results in a movement alongthe curve If other inputs were to change that would be shown as ashift in the curve We will see an example of such a shift later in thischapter

If two inputs are allowed to vary simultaneously the resultingproduction function can be illustrated as in Figure 5-5 with each curve(called an isoquant) representing a different level of output Curveshigher and to the right represent greater output levels than curves lowerand to the left For example point C represents a higher output level(200 units) than points A or B (100 units)

The isoquant that represents 100 units of output illustrates that thesame level of output (100 in this case) can be produced with different

Figure 5-4 A production function with one variable input


97

combinations of labor and capital (combination A versus combinationB) Thus if a country has abundant labor and little capital it might pro-duce using the combination of labor and capital represented by A If ithas abundant capital and little labor it might produce at B The isoquantthrough points A and B shows all the different combinations of laborand capital that can be used to produce 100 units of output It also tellsus how easy it is to substitute labor for capital in the production of thatoutput When isoquants are very curved inputs are not easily substi-tuted for each other Straighter isoquants imply easier substitution

Marginal Product and the Law of Diminishing ReturnsThe idea illustrated in Figure 54 that after some point adding addi-tional units of input tends to generate less and less additional output isknown as the law of diminishing returns Specifically the law says lsquoIn theproduction of any commodity as we add more units of one factor ofproduction to a fixed quantity of another factor (or factors) the addi-tions to total output with each subsequent unit of the variable factorwill eventually begin to diminishrdquo What is diminishing is the marginal

Figure 5-5 Production function with two variable inputs


98

output gain or marginal product of the factor (labor in Fig 5-4)2 As dis-cussed below the law of diminishing returns has important implica-tions for countries experiencing rapid population (and labor) growthwith a fixed natural resource base

A marginal product curve can be obtained (derived) from Figure5-4 by examining changes in total output for each successive unit of in-put The marginal product curve corresponding to the production func-tion in Figure 5-4 is shown in Figure 5-6 To the left of K the slope of theproduction function is increasing (Fig 5-4) thus the changes in outputare growing and the marginal product curve is rising (Fig 5-6) To theright of K the changes are smaller and marginal product curve falls Iftotal output eventually ceases to grow at all as more labor is appliedthe marginal product goes to zero this is point J on the productionfunction and on the marginal product curve Marginal productivity isimportant because it helps determine payments to factors of produc-tion such as wages paid to labor In addition the marginal productiv-ity of an input together with prices of outputs and inputs determinesthe demand for the input

Economic Optimality What Output and Input Levels Will

People ChooseAll points along a production function are equally possible to achieveBut are they equally likely to be chosen What factors might motivate afarmer to choose one point as opposed to another When people areasked what explains their choices they mention a variety of factors suchas input scarcity the need for output of particular products traditionsor habits and a desire to minimize risk Repeated studies have foundthat actual choices by large numbers of people over several years arebest explained by economic optimality Economic optimality means thatfarmers are rational and choose options that will give them the highestlevel of well-being attainable given the prices they face the availableresources and technology and their ability to absorb risk

Even in very low-income settings and across cultures farmers gen-erally attempt to optimize They may consider cultural and risk factorsas they optimize but economic well being plays an important role Be-cause farmers optimize they will generally choose to be somewherealong the production function and not below it For any given level of


2 The marginal product of an input is equal to the slope of the total product curve or∆Y∆X where ∆ represents a small change Therefore anything affecting this slopechanges the marginal product

99

Figure 5-6 Marginal product curve derived from the total product curve inFigure 5-4

input(s) they prefer to obtain as much output as they can attain In otherwords they prefer to be on the production function and not below itBut where along the total product curve would they prefer to producePrices help determine the answer Even for farmers whose productionis largely for home consumption some of their outputs and inputs aresold and purchased at prices set in markets off the farm When marketsset prices farmers can often reach the highest-possible level of well-being by maximizing profits subject to acceptable risk and then tradingthose profits for goods they want to consume

This kind of economic optimality typically leads to a single pointalong the production function as illustrated in Figure 5-7 In Figure 5-7 each level of profits can be represented by a straight line whose slopeis the price of the input divided by the price of output This ratio ofmarket prices is the rate at which the two goods could be exchanged inthe market In the left hand panel in Figure 5-7 the highest such linerepresenting the highest attainable level of profits occurs where theline touches the production function and their slopes are the sameMarginal revenue from the output equals the marginal cost of the input(MR=MC) On the right-hand panel in Figure 5-7 the profit line is the


100

ratio of the two input prices and also represents the total cost of pro-duction When farmers are producing on their production functionsand employing the correct amount of inputs to equate their marginalrevenue to their marginal cost of obtaining the last unit of output (theprice lines are tangent to the curves in Fig 5-7) they are said to haveachieved price or allocative efficiency This concept of efficiency can be animportant source of economic growth

SOURCES of ECONOMIC GROWTHWe can now use the production economics concepts described aboveto explore the possible sources of growth in an economy over time Oneof the major ways that economic growth can occur is through increasesin the amounts of inputs used in production While production func-tions usually refer to a particular type of output (say corn) one canthink of an aggregate production function relating total inputs to totaloutput or total national product Additional inputs can move a countryout of its aggregate production function to higher isoquants and higherlevels of output Therefore (1) population growth (which affects laboravailability and cost) (2) natural resource availability (which affects thecost of environmental factors such as land with its associated soils waterand forests) and (3) capital accumulation (which affects the availability

Figure 5-7 The economically optimal level of output and input choice


101

of man-made inputs) are three major elements in the development pro-cess These sources of growth cause movement along a given multi-factor production function

A second means of spurring economic growth is to change theway in which a country uses its factors of production increasing theamount of output produced by these inputs These output increasescan result from better organization of production or from shifts in theproduction function For example a new technology can shift the totalproduct curve upward so more output is produced per unit of inputs

BOX 5-1

SOURCES of GROWTH and the PRODUCTION FUNCTIONGrowth in output can occur either through a change in market opportuni-ties and relative prices which leads farmers to add inputs using existingtechnologies or because of an innovation that allows production of moreoutput at a given level of inputs

The left-hand panel below illustrates how profit-maximizing farmerswould respond to increasing abundance and hence lower relative price ofan input For example in poor countries when rural labor becomes moreabundant over time there is a decline in wages relative to other pricesleading farmers to apply more labor in land preparation weeding etc in aneffort to obtain more output

The right-hand panel shows how those same farmers might respondto a new invention such as better-performing seeds or veterinary medi-cine for their livestock Now the farmer can obtain more output at eachlevel of input This particular innovation was drawn so that the new profit-maximizing level of input use happens to be exactly the same as beforethanks to the innovation the farmer has gotten more output for no changein the input


102

There are three ways to get increased output per unit of input (1) in-creases in scale or specialization (2) increases in efficiency and (3) tech-nological change In many cases markets can change which in turnstimulates changes in these factors Movements along a given produc-tion function versus shifts in the function are illustrated in Box 5-1

A third means of stimulating economic growth is through increasedhuman capital as embodied in people (eg improved education andhealth) and improvements in social institutions (the rules of the game)Human capital can make labor more productive contributing to tech-nological progress and increased efficiency (especially when technolo-gies and markets are rapidly changing) Social institutions help defineproperty rights

Letrsquos examine more closely each of the sources of economic growth

The Demographic Factor Effects of Population Growth on

Agriculture and the EconomyFor most of history population growth was a major source of outputgrowth in the world People worked with primitive tools and morepeople meant more labor and output Crop and pasture areas expandedwith the rural workforce although output per person remained roughlythe same A greater population density also reduced the distance be-tween people and made it easier to develop cost-effective services suchas transportation communications schooling and so forth Popula-tion growth however is a mixed blessing because while there are moreproductive hands there are more mouths to feed As long as farmlandis plentiful land frontiers can be pushed back and growth continues inthe agricultural sector but in most areas of the world the best farm-land has been exhausted and rising numbers of farmers have no choicebut to invest more time in each field In this situation diminishing re-turns to labor cause farm incomes to fall unless farmers can turn to analternative source of growth

Population growth may also mean an increasing number of chil-dren relative to adults If the number of consumers is growing fasterthan the number of producers then the effect of population growth isalso more likely to be negative If population growth results from ex-tending the productive life of workers the odds of its effect being posi-tive improve


103

Natural Resources Environmental Influences on the

Location and Pace of DevelopmentNatural resources mdash including land and its associated soil water for-ests and minerals mdash have played an important role in economic devel-opment The extension of the frontier in the United States brought moreland and mineral resources into production and helped create wealthSimilar expansions have occurred in other countries Extensive use ofother types of natural resources has been important as well For ex-ample in the eighteenth and nineteenth centuries one of the most im-portant resources was coal as countries with large and easily-acces-sible coal deposits such as Britain used coal to fuel their local indus-trial revolution In the 20th century oil became important in some coun-tries Will natural resources continue to be an important source of eco-nomic growth or will they be a limitation to future growth

Some have argued that Earth is like a spaceship that its naturalresource capacity is finite There is only so much land and indeed wesee increasing problems with soil erosion deforestation and overgraz-ing Increased combustion of fossil fuels releases carbon into the atmo-sphere and depletes a finite supply of these resources Water resourcesare exploited to their fullest potential (or overexploited) in many places


Ecuadoran children

104

A plow and bullock can be a sizable investment in many developing countries

While technologies change and in essence create new resourcesthere is no question that land is limited and that the opening of newuninhabited fertile lands will be much less important to future eco-nomic growth in most countries than it has been historically It is alsoclear that many resources particularly forests and minerals are beingdepleted in many countries and are thus becoming less available tostimulate growth than they once were The real question for most coun-tries may not be whether exploitation of natural resources will be asignificant source of growth but whether natural resources will act as aconstraint to growth and what will be the cost involved in transitioningfrom one natural resource regime to another This issue is discussedfurther in Chapter 9

Accumulation of Physical CapitalPhysical capital may be defined as a countryrsquos stock of human-madecontributions to production consisting of such items as buildings fac-tories bridges paved roads dams machinery tools equipment andinventory of goods in stock Physical capital as we refer to it here meanshuman-made physical items and not money stocks and bonds etc Itrefers to private physical goods but also public investments in physicalinfrastructure

Capital accumulation is the process of adding to this stock of build-ings machinery tools bridges etc Another name for capital accu-mulation is investment Capital investment is important because it can


105

increase the amount of machinery and tools per worker thereby in-creasing the output or marginal product per worker A higher mar-ginal product per worker usually leads to a higher income per worker

Capital accumulation is also related to the possibilities of makingchanges in the scale of technology of production Furthermore the pro-cess of capital accumulation involves a choice between consumptiontoday and investing for future economic growth The choices of howmuch to invest and in what types of capital have important implica-tions for the rate and direction of economic development As will beargued throughout this text investment should be guided along anappropriate path by signals (prices) that reflect the true scarcity of re-sources

Technological ProgressIncreases in input levels (land labor and capital) accounted for mucheconomic growth prior to the nineteenth century However evidencesuggests that changes in the ways goods are produced have been theengine of modern economic growth for many if not most countries Thethree sources of growth mentioned above involve increasing inputs witha given production technology Economic growth can occur but onlythrough exploitation of natural resources and labor or accumulation ofcostly resources through savings and investment from year to year Moreimportant this type of growth is subject to diminishing returns asmovements along the production function generate smaller and smallerincrements of output for each additional unit of input Sustaining eco-nomic growth over time requires the constant invention of new tech-nologies to shift the production function and overcome diminishingreturns (see Box 5-1)

If technological progress allows the same or fewer resources toprovide more output the value of output per unit of resources risesand this rise can lead to increases in per-capita income Resources canalso be freed up to provide new types of goods The phenomenon oftechnological progress is not new and has been occurring for many yearsWhat is new is the rapidity with which new technologies are being de-veloped Modern technological progress is the result of both applied sci-ence and new knowledge in the basic sciences

SpecializationAs innovation occurs and capital is accumulated increasing opportu-nities arise for people to specialize and trade with each other Such spe-cialization and trade can raise productivity and attract savings and in-vestment Specialization is related to scale as well As firms increase in


106

size specialization is facilitated ldquoDivision of laborrdquo can make workersmore efficient as they become proficient at just a few tasks Adam Smithargued that this type of division of labor is at the heart of economicgrowth In his famous book The Wealth of Nations (1776) he noted thatspecialization is limited only by ldquothe extent of the marketrdquo or the easewith which one person can trade with others both within and acrosscountries As markets expand the possibilities of mass-producing goodsenable firms to gain efficiency in both production and marketing In-creased scale and specialization allow more output per unit of inputand hence growth

Efficiency ImprovementAnother type of organizational change that can lead to economic growthis improved production efficiency Improved efficiency means gettingmore for the same inputs

Efficiency can be divided into different types Technical efficiencyrelates to whether producers are producing on the production functionas opposed to below or inside it Using the same amount of inputssome producers obtain higher output levels than others due to differ-ences in management and effort Price or allocative efficiency mentionedabove and illustrated in Figure 5-7 relates to the degree to which pro-ducers operating on their production functions employ the correctamount of inputs to equate their marginal revenue to their marginalcost of obtaining the last unit of output By definition producers whomaximize profits are both technically and allocatively efficient

Market efficiency is related to the type of economic system and thedegree of market power within it Improvements in resource allocationoccur through market efficiency when increased competition or newtechnology lowers the margin between buyers and sellers A countrythat has a relatively free market with many buyers and sellers so thatno producer or consumer can affect prices has greater market efficiencythan one with a few producers who are able to control prices The avail-ability of good information affects the degree of market efficiency andimproved information flows can help create growth due to more effi-cient allocation of productive resources

Human CapitalSo far in this chapter we have explained economic growth without as-suming any change in the people themselves Much of economic growthis driven by changes in peoplersquos capabilities or their human capital asaffected particularly by their education and health The nature of these


107

capabilities is easily misunderstood Even the most illiterate impover-ished person is often intelligent and skilled but educated healthy peoplecan more easily contribute to the generation of new technologies andmore readily utilize those technologies Education is therefore an im-portant source of economic growth inextricably linked with techno-logical progress and of course with the productivity of labor Part ofthe economic benefits of education is derived from improved produc-tivity of workers part from improved quality of management and partfrom educationrsquos contribution to producing new or improved technolo-gies3 The term human capital is used in referring to education becauseeducation is an investment in many ways similar to physical capital inrequiring an investment of resources that pays off over a long period oftime and eventually depreciates

Education is important but in the lowest-income countries anequally important form of human capital is a personrsquos health Under-nutrition and preventable diseases remain the worldrsquos biggest killersand they sharply reduce the productivity of those who survive Im-provements in nutrition and disease control raise output directly andalso make it easier and more worthwhile to keep children in schoolleading to more education as well Human capital improvements dueto investments in health have also been called improvements in physi-ological capital4

Education and health are forms of human capital that are embod-ied in particular individuals If you were to trade places with a lower-income person the odds are you would be more educated and healthierand that might influence what you could do But if others in your soci-ety were also healthier and better educated that would allow you todevelop different expectations about their behavior as well You couldrely more on other people using your mutual education to developand communicate new ideas about how to work together

Institutional ChangeHistorical patterns of economic growth exhibit remarkable differencesacross countries and over time Levels and rates of growth differ sig-nificantly even among neighboring countries Many of these differencesare not solely attributable to sources mentioned above but to institu-tions as well Institutions include government policies legal structures


3 Education can of course have other benefits associated with the capacity to developnew institutions and with many non-economic factors

4 Robert Fogel National Bureau of Economic Research Working Paper 9771 June 2003

108

BOX 5-2

NEW TECHNOLOGIES INPUT USE and the DEMAND for

INNOVATIONTechnological innovations can have different impacts on a farmerrsquos inputuse and output levels and changes in resource availability can lead todifferent kinds of innovation The diagrams below illustrate how farmersrsquoprofit maximization affects their response to new technologies and affectsthe kinds of new techniques that are most needed in various countries

The left-hand panel shows an innovation that with no change in rela-tive prices would lead a farmer to increase input use The most importantexamples of such technologies are ldquogreen revolutionrdquo crop varieties whosegrowth habits and stress tolerance make it worthwhile for farmers to applymore labor fertilizer and water to the plant

The right-hand panel shows another kind of innovation that with nochange in relative prices would lead a farmer to cut back on input useMost such input-saving innovations are mechanical devices such as big-ger faster implements which take less capital and labor to do a given task

ldquoInput-usingrdquo innovations involve the discovery of new techniques tothe right of existing input levels whereas ldquoinput savingrdquo innovation involvesdiscovery of new techniques to the left of them Price changes by leadingfarmers to look for new techniques in one direction or the other help influ-ence which kind of innovation is more likely to be discovered and adoptedMost notably in poor countries where the farm labor force is rising labor-using innovations are demanded In contrast once the farm labor forcestarts falling in richer countries labor-saving mechanization is farmersrsquopriority


109

and market structures If markets exhibit distortions efficient price sig-nals will not be received by producers if financial markets are incom-plete or characterized by excessive risks savings and capital accumula-tion will be constrained If people are unsure about their ability to re-cover investments due to political instability or ill-defined propertyrights they will not undertake investments The ability of institutionsto adapt to new needs and demands can itself be a source of economicgrowth

During economic growth there is often explosive growth in manykinds of social institutions This new social capital may displace previ-ous institutions such as family or village networks which might havebeen helpful but are not as well-adapted to the new circumstances Someof these institutional changes are a result of economic growth but insome they may play a causal role in economic development so that atransfer of institutions could accelerate growth For example manycountries benefit from the introduction of quality certification systemsto enforce grades and standards uniform procedures for contract en-forcement and commercial law and well-adapted property rights ofvarious sorts

SUMMARYEconomic growth involves a transition from low-income agriculturalsocieties to higher-income non-farm employment The process is drivenby capital accumulation technological innovation and specializationin either sector An economic transformation occurs for several reasonsFirst demand for food is relatively fixed It is ldquoincome-inelasticrdquo so whenincomes grow demand for other things grows faster Second productiv-ity increases in agriculture free up resources for nonagricultural pro-duction Third as people specialize and trade with each other manytasks that were previously done on the farm are now classified as non-agricultural

Although agriculture declines as a share of the economy the sec-tor does not shrink Typically total farm output continues to rise dur-ing economic growth Furthermore when the total population is grow-ing the number of farmers tends to rise for many years until the abso-lute size of the non-farm sector is large enough to absorb all those en-tering the workforce each year The resulting change in land area perfarmer will often place downward pressure on rural living standardsduring the early stages of economic development even as the rest ofthe economy grows


110

To explain the causes and consequences of economic growth weuse production functions that describe for a given technology the dif-ferent amounts of product that can be obtained from different levelsand combinations of inputs An isoquant shows different combinationsof two inputs that can be used to produce the same level of outputgiven a particular technology The law of diminishing returns has im-portant implications as population or capital increases against a fixedland base To overcome diminishing returns and sustain growth overtime people need technological change increased specialization andtrade and improvements in efficiency that may be related to improve-ments in human capital and institutions

IMPORTANT TERMS and CONCEPTSCapital accumulation Law of diminishing returnsEconomic efficiency Marginal productEconomic transformation Natural resourcesEducation Non-farm job opportunitiesHuman capital Population growthInput demands Production functionInput response curve Scale and specializationInstitutional change Sources of economic growthIsoquant Technological progress

Looking AheadThe sources of growth discussed above relate to whole economies tosectors within economies and to individual firms (including farms)Various theories have been proposed to explain how the sources ofgrowth have been or could be combined to transform economies fromlow to higher standards of living We examine these theories in the nextchapter In subsequent chapters we consider how these growth factorscan affect firms within the agricultural sector

QUESTIONS for DISCUSSION1 What is meant by the term factors of production2 What are the three major factors of production and how do they

relate to the major sources of economic growth3 What is the law of diminishing returns and what might be its

significance in relation to population growth4 Will natural resource limitations be a serious restriction to future

economic growth or growth in food production5 What is capital accumulation and why is it important to

development


111

6 Why are specialization efficiency and technological progressimportant to agricultural and economic development

7 Why is an economic transformation inevitably associated witheconomic development

8 What factors determine the rate at which an economy becomestransformed from an agricultural to a mixed economy with signifi-cant nonagricultural as well as agricultural activities

9 If the total labor force were growing 2 percent per year and 50percent of the labor force were in agriculture how fast wouldnonagricultural employment need to expand in order to hold thenumber of people employed in agriculture constant Why is thisimportant

10 What are the implications of the economic transformation for theagricultural sector

11 What is meant by the terms human capital and institutionalchange

RECOMMENDED READINGSAnderson Kym ldquoOn Why Agriculture Declines with Economic

Growthrdquo Agricultural Economics vol 3 no 1 (October 1987) pp 195ndash207

Gardner BL ldquoCauses of Rural Economic Developmentrdquo in D Colmanand N Vink Reshaping Agriculturersquos Contributions to Society (OxfordUK Blackwell Publishing 2005) pp 21ndash41

Ruttan V Productivity Growth in World Agriculture Sources andConstraints Journal of Economic Perspectives vol 16 (Fall 2002) pp161ndash84

Thirlwall AP Growth and Development (New York Palgrave Macmillan2006) Chapters 4ndash6


112

CHAPTER 6

Development Theory and

Growth Strategies

We can realistically envision a world without extreme poverty by the

year 2025 because technological progress enables us to meet ba-

sic human needs on a global scale mdash Jeffrey Sachs1

People respond to incentives all the rest is commentarymdash Steven Landsburg2

THIS CHAPTER1 Reviews how economic development and growth theories have

evolved over time including the role of institutions2 Considers the interaction of technology and institutions3 Considers the distinctive characteristics of agriculture as opposed

to other sectors as the economy develops

The HISTORICAL EVOLUTION of DEVELOPMENT THEORYIn the previous chapter we identified potential sources of economicgrowth and the inevitable structural transformation that accompanieseconomic development We turn now to ideas and theories that attemptto explain how these sources of growth can be integrated into transfor-mation processes that produce higher living standards The search forappropriate theories of economic development has received economistsrsquoattention for two centuries Different theories have led to different im-plications for what governments private firms or individuals mightdo to achieve their goals One especially important contrast concerns

1 Jeffrey Sachs The End of Poverty Economic Possibilities for Our Time (New York Pen-guin 2005) p 347

2 Steven Lansburg The Armchair Economist Economics and Everyday Life (New YorkFree Press 1995)

113

the relative roles attributed to technology and productivity (reflectedin the quotation above from Jeffrey Sachs) as opposed to institutionsand incentives (reflected in the quotation above from Steven Landsburg)Emphasis has shifted over time partly because of changes in constraintsthat limit economic growth partly because of changing technologicalpossibilities and partly because of experiences with what has or hasnot worked We consider in this chapter the historical progression ofthinking among economists Over time a synthesis of ideas has emergedwith increased focus on the interaction between technology and insti-tutions

The Classical PeriodThe late eighteenth century is known as the classical period in economicthought and the books written then remain widely debated today One ofthe most enduring debates concerns the role of international trade At thetime conventional wisdom held that a countryrsquos wealth like the wealth ofan individual could be measured by the amount of its gold and othermonetary assets Exports were believed to be better than imports and thismercantilist view provided an important argument for trade restrictions inBritain and elsewhere Adam Smith challenged the mercantilist idea ar-guing that freer trade in both directions would produce higher standardsof living especially if combined with a more competitive equal-opportu-nity environment at home Adam Smithrsquos arguments were extended byJohn Stuart Mill and David Ricardo and their ideas about the division oflabor and specialization comparative advantage and trade remain keyconcepts in modern economics Their theories about the value of freer tradewere not easily accepted at the time however and many mercantilist ideasremain widespread today

The eighteenth century was a period of both economic expansionand population growth Many political leaders argued that having morepeople would help make each country richer In the early nineteenthcentury this idea was challenged by Thomas Malthus who argued thatpopulation was limited mainly by the food supply and by a fixed sup-ply of high-quality land Ricardo agreed with Malthus and was pessi-mistic that growth could be sustained in the long run in a country be-cause of the implications of population growth given the law of dimin-ishing returns Their classical theory in its simplest form proceeds asfollows (1) There are two broad types of people workers whose onlyasset is their labor and capitalists who own land and capital With acertain amount of labor just enough wages are paid to cover workersrsquosubsistence (2) If a new invention or some other favorable event cre-ates an increase in production a surplus above that necessary to pay

CHAPTER 6 mdash DEVELOPMENT THEORY AND GROWTH STRATEGIES

114


the subsistence wage is generated which is accumulated by capitalists(3) Such accumulation increases the demand for labor and with a givenpopulation in the short run wages tend to rise (4) As wages exceed thelevel of subsistence population grows generating an increased demandfor food (5) But if high quality land is essentially fixed the rise in fooddemand is met by bringing lower-quality land into production Theprice of food rises to cover the higher cost of production on lower-qual-ity land (6) The effects of increased population (supply of labor) andhigher-priced food drive the real wage or the wage paid divided byfood prices back to the subsistence level and the rate of populationgrowth declines

Thus in the classical model diminishing returns to increments oflabor applied to a relatively fixed supply of high-quality land and highercosts of production on lower-quality land represent constraints togrowth so that living standards remain at subsistence levels If techno-logical progress occurs the situation may change temporarily but notpermanently Ricardorsquos policy prescription was for Great Britain toremove its corn laws which would free up trade and allow foodimports to keep the price of food from rising and choking off indus-trial growth

History has shown that the classical model underestimates the roleof technological progress It also fails to consider factors that tend tolower birth rates as economic growth occurs It oversimplifies the forcesinfluencing wages and the complexity of the sharing or distributionobjective found in many societies Nevertheless as we will see belowcertain aspects of the classical model had a significant influence on sub-sequent theories of economic development especially its emphasis ondiminishing returns and its implications for trade

Growth Stages From Marx to RostowBy the late nineteenth century there had been enough economic devel-opment in Europe and North America for observers to notice a clearshift in the mix of activities Many economists focused on patterns ofsuch change arguing that economies moved through sequential growthstages While the suggested sets of stages were based on different prin-ciples most growth stage theories attempted to emphasize that eco-nomic development involves a structural (economic andor social)transformation of a country

In the late nineteenth century Frederick List a German economichistorian developed a set of stages based on shifts in occupationaldistribution His five stages were savage pastoralism agriculture

115

agriculture-manufacturing and agriculture-manufacturing-commerceConcurrently another German Karl Marx visualized five stages ofdevelopment based on changes in technology property rights and ide-ology His steps were primitive communism ancient slavery medievalfeudalism industrial capitalism socialism and communism He feltthat class struggles drive countries through these stages One class pos-sesses the land capital and authority over labor while the other pos-sesses only labor Class struggles occur because economic institutionsallow the exploitation of labor Prior to reaching the final stage labor isnever paid its full value For example if wages rise in the fourth stage(industrial capitalism) labor is replaced by machines thereby creatinga ldquoreserve army of the unemployedrdquo that brings wages back downBecause capitalists derive their profits from labor more machines andfewer laborers mean lower profit rates The pressure of lower profitsleads to more exploitation more unemployment mass misery and even-tually revolution Labor then gains control over all means of produc-tion under communism

A different kind of thinking about growth stages emerged in theearly twentieth century when Alan Fisher and later Colin Clark de-veloped a theory in which the transition from agriculture to manufac-turing and services occurs not because of government intervention butbecause of increases in output per worker and advances in science andtechnology Another growth stage theorist Walt W Rostow argued inthe 1950s that these changes were closely related to the rate of growthin per-capita incomes which would experience a ldquotake offrdquo into sus-tained growth once enough capital had been accumulated Rostow be-lieved however that an eventual slowdown in the rate of growth wouldbe the normal path for any sub-sector in an economy due to decliningprice and income elasticities of demand for the goods produced by asector In this view the secret to growth is to find and support emerg-ing or ldquoleading sectorsrdquo

Thinking of the economy in terms of distinct sectors has some ad-vantages but the idea of distinct growth stages fell out of favor in the1950s Countries experienced a wide variety of growth paths duringthe 1950s and 1960s and some experienced sharp reversals of fortuneMost economists no longer thought of economic growth as a predeter-mined sequence of stages which had relatively little prescriptive powerbut instead focused on the gradual accumulation of productive re-sources particularly capital


116


Capital Accumulation From the ldquoFinancing Gaprdquo to

Technology-Driven GrowthThe first widely-used theory of growth based on capital accumulationwas developed by Roy Harrod and Evsey Domar They used math-ematical formulas to show how the rate of output growth would belimited by the level of investment and hence the national savings ratemultiplied by the productivity of those investments The Harrod-Domarmodel was simple and elegant and yet could still be fitted to real datausing the observed capitaloutput ratio of the economy to project theproductivity of additional investment

In the 1960s when the Harrod-Domar approach was applied tolow-income countries it was recognized that national savings was notthe only possible source of capital Borrowing from abroad could addto national savings permitting an even faster growth of the capital stockSuch ldquotwo-gaprdquo models popularized by Hollis Chenery and othersimplied that foreign aid to fill a ldquofinancing gaprdquo could accelerate growthsignificantly as each dollar of aid would have the same productivity asa dollar of savings

The Harrod-Domar-Chenery approach focused primarily on therate of national savings or borrowing from abroad with less attentionto the efficiency with which additional funds were spent In the mid-1950s Robert Solow worked out the mathematics of a model in whichadditional capital earns diminishing returns In that case the long-runrate of growth of per-capita income is driven by the rate of technologi-cal progress not savings as such Solow did not explain how techno-logical progress is generated he treated new technology (and hence thegrowth rate of the economy) as exogenous to (outside of) his modelMuch later a new generation of economists would make growth mod-els in which people choose how much to invest in new technologies sothat technical change and hence the growth rate is endogenous ex-plained by property rights and government policies Those models aredescribed in the final section of this chapter

Dual-Economy Models ldquoSurplus Laborrdquo and

UnemploymentThe first mathematical models of growth used a single sector to de-scribe the whole economy and focused on capital accumulation Soonthereafter economists produced models with two sectors in whichgrowth and poverty alleviation depend crucially on the allocation oflabor The most influential dual-economy (or two-sector) model was de-veloped by W Arthur Lewis His model was subsequently modifiedby John Fei and Gustav Ranis Dale Jorgenson and others

117

A simplified version of the dual-economy model can be illustratedusing the total and marginal product curves shown in Figure 6-1 Thisversion of the model is designed to relate most closely to the situationin large labor-surplus but relatively natural-resource-poor countries inwhich domestic (as opposed to international) characteristics of theeconomy dominate The model could potentially represent (albeitroughly) the situation in a country such as India or China

The model includes several sources of growth discussed in Chap-ter 5 and illustrates the potential for using ldquosurplusrdquo labor and techno-logical progress in agriculture to achieve economic growth It assumesthe existence of a large population in the traditional agricultural sectorfor which the marginal product of labor is below the wage rate whichis determined by societyrsquos rules about sharing output There is disguisedunemployment in the sense that if the people who appear to be work-ing are removed production will not drop or will drop very little Inother words labor is applied in the agricultural sector up to the pointwhere it is redundant in the upper left-hand graph in Figure 6-1 or tothe right of N3 or N2 in the lower left-hand graph

Figure 6-1 Graphical representation of labor-surplus dual-economy model


118


The wage rate in agriculture (W) is assumed to initially approxi-mate the average productivity of labor in that sector (and eventu-ally be determined in an inter-sector labor market) Land is fixed Wagesin the modern industrial sector are assumed to be higher than in theagricultural sector in order to attract labor from the agricultural sectorFirms in the modern sector hire labor up to the point at which the mar-ginal product of labor equals the wage rate Initially this is the point Poin the lower right-hand graph of Figure 6-1 Labor in industry is hiredup to Lo at the wage P

In a ldquolabor surplusrdquo economy the development process can bedriven by transfer of labor from agriculture to the industrial sectorwhere it creates a profit that can be used for further economic growthIn the lower right-hand graph in Figure 6-1 total wages initially paid tolabor in the industrial sector equal the area PPoLoO while profits equalthe triangular area QP0P This profit or part of it is reinvested in capi-tal items such as equipment machinery and buildings mdash items thatmake labor more productive This greater productivity shifts the totalproduct of labor in industry upward (see the upper right-hand graphof Figure 6-1) and the corresponding marginal product of labor (de-mand for labor) out to the right (see the lower right-hand graph of Fig-ure 6-1) This demand for labor is met by drawing more labor out ofagriculture

In the model a shift of labor from agriculture to industry contin-ues to drive economic growth as long as the marginal cost of labor re-mains constant (represented by the horizontal line between Po and P2in the lower right-hand graph in Fig 6-1) Once the supply of ldquosurplusrdquolabor from the traditional farm sector has been absorbed the marginalcost of labor supplied to the modern sector turns upward (as it does tothe right of L2) the growth in demand for labor by industry slowsbecause fewer profits are available for reinvestment

Why might the wage rate in industry increase and the demand forlabor stop shifting out First surplus labor in agriculture might be usedup so industry would have to offer higher wages to compete with agri-culture for labor Second food production will start to decline if fewerthan N2 workers are employed in the agricultural sector If populationis increasing and incomes in the industrial sector are rising then thedemand for food will rise Unless an increase in agricultural produc-tion occurs agricultural prices eventually rise relative to industrialprices This rise in turn raises the wage at which employers are able toobtain workers from agriculture for industry The major implication isthat economic growth becomes constrained unless there is technologi-cal improvement in both sectors

119

The labor-surplus dual-economy model is a highly simplified viewof the situation in countries with underemployed people It has severallimitations First evidence indicates that few if any situations exist wherethe marginal product of labor in agriculture is close to zero Few coun-tries have excess labor in agriculture However Jorgenson and othershave pointed out that the presence of an active labor market in whichthe two sectors compete for labor can generate the same implication ofthe need for technological improvement in both sectors Second themodel ignores the possibility of international trade although it couldbe added without much difficulty Third and more important the modelfails to recognize the cost of resources used in conducting research andeducating farmers to produce more and facilitate adoption of new tech-nologies The issue of how to endogenize (build in the process for selfgenerating) the development of new technologies in a model of eco-nomic development was not addressed Despite these limitations it isa useful means of thinking about linkages between multiple economicsectors in a developing-country context

Dependency Theory and Trade ProtectionismIn the 1950s and 1960s a number of theorists saw international tradeand investment as a cause rather than a remedy for poverty in low-income regions arguing that trade made the poor increasingly depen-dent and weak Immanuel Wallerstein for example popularized theidea that prosperity of the ldquocenterrdquo was linked to the impoverishmentof the ldquoperipheryrdquo Dependency theory encompassed a range of argu-ments generally leading to the conclusion that the governments of low-income countries should protect their local economies from foreign tradeand investment pursuing self-sufficiency as a form of political and eco-nomic independence

A few dependency theorists notably Andre Gunder Frank

adopted a Marxist perspective arguing that the income of wealthy coun-tries was derived from the output of poor countries In this view wealthycountries use military and political power to limit poor countriesrsquo op-tions and thereby extract income that would otherwise belong to thepoor Some expropriation of this type clearly has occurred in the colo-nial period and through other kinds of intervention but most economichistorians believe the output of poor countries can explain only a verysmall fraction of the wealth we see in industrialized countries

A more widely-accepted set of ideas come from structuralists suchas Raul Prebish and Hans Singer who argued that market forces limitthe degree to which poor countries can develop through trade withricher countries In this view the terms of trade (the ratio of prices of


120


exports to prices of imports) tend to turn against developing countriesover time because they produce mainly primary products (agriculturaland mineral) for which prices decline over time relative to the manu-factured products they import This deterioration in the terms of trade isbelieved to be generated by (1) low price and income elasticities of de-mand for primary products compared to manufactured products (2)slow productivity growth in primary product production and (3) mo-nopolistic elements in the production of products imported by devel-oping countries while primary products are produced competitivelyTo the extent that demand for poor countriesrsquo exports is price- and in-come-inelastic then output expansion in the poor countries or in theworld as a whole does indeed worsen poor countriesrsquo terms of tradealthough again this influence can explain only a fraction of the incomegap between rich and poor countries

The trade restrictions favored by dependency theorists could alsobe justified by much older arguments in favor of government interven-tion to protect domestic markets from foreign competitors notably theidea that infant industries can get started only if they are temporarilyprotected from foreign competition and the idea that a big push to ex-pand many industries simultaneously could help countries take advan-tage of synergies between them During the 1970s and 1980s howeverit became increasingly clear that industrialization aimed at replacingimports for the domestic market could generate only a temporary burstof economic growth Export-oriented industrialization proved to bemore successful

Contemporary Growth Theory Technological Innovation

and Public InstitutionsBy the mid-1980s enough statistics on national income across coun-tries were available for researchers to test the basic predictions of thestandard growth model posited thirty years earlier by Robert SolowResults were surprising and sparked a burst of academic research oneconomic growth and poverty reduction that continues today

The Solow model predicted that poor countries would eventuallycatch up to rich ones because of diminishing returns to capital Statisti-cal tests showed that this type of ldquoconvergencerdquo did indeed occur butonly among sub-groups of countries The highest-income group of coun-tries continued to grow with no sign of diminishing returns while somepoorer countries grew even faster to catch up and other poor countriesjust stayed poor

Economic theorists attempted to explain these results RobertLucas Paul Romer and others showed how rich countriesrsquo growth could

121

be explained by a flow of new technologies which help overcome di-minishing returns Their models hinge on the idea that new knowledgeis a public good once discovered it can be used repeatedly in newtechnologies without being used up and so technological innovationscan accumulate without limit But not all countries are able to generateor use these innovations

What determines whether a country develops and applies appro-priate new techniques Knowledge itself is a public good whose de-velopment and dissemination depends on public education and gov-ernment-funded research Individuals and private firms will never haveenough incentive to invest as much in these resources as they are worthto society as a whole But knowledge is economically valuable onlywhen embodied in goods and services that meet consumer needs Suc-cessful countries promote both public knowledge and also private enter-prise encouraging new enterprises with new technologies

A key question is the degree to which innovators should be givenmonopoly rights over the sale of new products through patents andother forms of intellectual property rights Government-enforced pro-tection from imitators is a double-edged sword it makes each inven-tion more profitable than it otherwise would be but it does so by re-stricting its use The patent policies that are most economically suc-cessful limit the scope and duration of protection to be just enough toreward past innovators while encouraging others to make use of theinnovation The British and US patent systems were early pioneers inthis regard offering protection only to a specific product (to allow theentry of other somewhat similar products) and limiting the time pe-riod of protection (to hasten the entry of other firms) while allowingcompetitors to challenge othersrsquo patents in a free and fair judicial sys-tem

The interplay among technology natural resources human capi-tal and institutions remains an active area of research today It is clearthat other sources of growth are only effective if they operate in aninstitutional environment conducive to growth The importance of therule of law enforceable property rights and contracts absence of seri-ous government distortions to markets and relatively low levels of cor-ruption are all important to economic development The high costs oftransacting also seem to prevent many countries from realizing im-proved levels of living Improved information flows may help re-duce the cost of transacting and make it more difficult for inefficientinstitutional and political structures to survive We return to this issueof how to reduce transactions costs in Chapter 11


122


FROM THEORY to ALTERNATIVE STRATEGIESThe concept of a development strategy implies a long-term road map thatencompasses a series of fundamental decisions with respect to sectoremphasis (agriculture versus industry) factor use (capital-led versusemployment-led growth) international market orientation (inwardversus outward) concern for growth versus distribution and the rolesof the private versus the public sector Many of these decisions presentconflicting choices that countries must make when designing their de-velopment strategies The appropriate path for a particular countrydepends on its starting characteristics and global economic conditions

Industry versus AgricultureThe question of whether to channel public and private investments intothe agricultural or industrial sectors has been asked by policymakersfor many decades In most countries agriculture is initially the domi-nant sector containing most of societyrsquos resources but it contains thepoorest and least politically influential people and so is often relativelyneglected by government Investments in agriculture are slowed by thisweak political base but other factors inhibit such investments Impactsof agricultural productivity growth can be difficult to observe As seenin Chapter 5 an increase in farm output generally leads to an increasein other activity as farmers invest their resources in non-farm enter-prises and a lower cost of food helps non-farmers buy more of otherthings So agriculture appears to be a slow-growth sector even as itdrives the expansion of other sectors Politicians generally want to pleaseurban constituents and often adopt policies to lower food prices Lowerfood prices in turn reduce the profitability of investments in agricul-ture There is usually much stronger political pressure for urban in-vestments and for policies that produce immediate highly visibleresults

The degree to which governments support agriculture as opposedto industry also depends on world market conditions in the late 1960sand early 1970s the threat of food scarcity associated with Asian popu-lation growth led many countries to invest heavily in irrigation andcrop breeding to raise agricultural productivity especially within AsiaDuring the 1980s and 1990s the payoff from those investments pro-duced a relative abundance of food on world markets which reduceddemand for further investment even in regions such as Africa wherefood was increasingly scarce During the current decade agriculturalmarkets have tightened again due in part to those lower investmentsin agriculture in the 1980s and 1990s and in part due to growth in use

123

of agricultural products for bio-fuels The resulting higher prices forfood once again appear to be stimulating some public investments inagriculture In addition private companies and private foundations suchas the Gates Foundation have responded with increased investments inagriculture

Inward- versus Outward-Led GrowthA persistent debate in the development literature has centered on themerits of an inward (import-substitution self-sufficiency)ndashorientedstrategy versus an outward (international trade export promotion)ndashoriented strategy Some observers have argued that developing coun-tries are hurt by trade because they produce mainly primary productsfor which prices decline over time relative to the manufactured prod-ucts they import In addition the colonial heritage in several develop-ing countries included the export of certain primary products to devel-oped countries with the profits going to foreign companies or to smallgroups of elites in the developing countries Proponents of an inwardstrategy have also argued that countries following an inward-orientedpath suffer less from debt crises and protectionist policies in the devel-oped countries

The impact of inward-directed strategies depends largely on thepolicies used to implement the strategy Policies such as overvaluedexchange rates import restrictions and explicit export taxes which dis-courage exports and stimulate substitution of domestically producedgoods for imports have generally been shown to be counterproduc-tive They lead to distortions in resource prices create monopoly prof-its high government budget deficits and usually inflationary pres-sures Policies supporting production of foods for internal consump-tion via research infrastructure and other public investments can becalled inward-oriented yet are not associated with some of the distor-tions caused by measures typically used to promote import-substitu-tion

Proponents of outward strategies argue that by removing the biasagainst exports countries can achieve significant economic benefits fromspecialization and comparative advantage from the import of productsmanufactured by highly capital-intensive industries abroad and fromthe stimulus to employment provided by reduced pressures to con-centrate capital in a limited number of capital-intensive industriesEconomies of scale can be achieved due to enlargement of the effectivemarket size Some countries that have been successful at promotingexport-led growth have in fact also relied on government interven-tions in exporting industries


124


Theoretical arguments support either position However over thepast 30 years empirical evidence is weighted in favor of an outward-looking strategy that biases the economy neither for nor against ex-ports Evidence shows that policies often used to create an inward-look-ing strategy can lead to inefficiency The economic efficiencies sacri-ficed in attempts to insulate a country from world market forces can besignificant Open markets expose a country to the effects of protection-ist policies and interest rate fluctuations abroad However they alsooffer insurance against risks originating at home

Outward-looking strategies will be most successful if internationalmarkets are truly competitive and if access to markets is unrestrictedInternational trade agreements covered later in this book have movedthe world markets toward more transparency and fewer trade restric-tions Many restrictions however still exist

Growth versus EquityThe persistence of abject poverty even in countries experiencing rapidrates of economic growth has spurred a debate over the appropriatefocus of development efforts Most of us accept the goal of lifting asmany people as possible out of extreme poverty but there are manycompeting ideas on how to do it Essentially three general approacheshave been suggested sometimes in combination The first is to makedirect transfer payments (money goods services) from the more well-to-do to the poor The second is for the country to concentrate entirely

Many developing countries have a comparative advantage in exportingsugar but face protectionist sugar policies in developed countries

125

on growth as a goal no matter who receives the income in the expecta-tion that part of the benefits will trickle down to the poor A third ap-proach is to direct specific efforts toward raising the productivity of thepoorest segments of society during the growth process

Direct transfer payments are difficult for developing countries toafford unless obtained as grants from international sources The mostimportant role of direct transfers can occur (1) during short-run weather-induced famines unusually high food price spikes or other emergencysituations and (2) among the perpetually disadvantaged elderly or-phaned and handicapped

The majority of the poor in most developing countries howeverare the unemployed and underemployed rural landless Even unskilledurban workers are usually better off than the rural landless The land-less live close to the margin and may fall below it during bad crop yearsTherefore the important question is whether the benefits of growth willtrickle down to the poor or whether development efforts must be di-rected at the poor

During rapid growth some benefits are captured by the poorHowever the income distribution often will worsen (become more un-equal) during initial stages of growth unless specific efforts are directedtoward incorporating the poor into productive activities The poor canbe bypassed by growth-oriented investments especially when posses-sion of assets particularly land and education is skewed Countriesthat begin with a more equal distribution of assets tend to experiencegrowth with equity more than others Growth can actually stagnateunder conditions of extremely inequitable asset distribution Growthitself can be affected by the wider spread of assets institutional changesand employment-creating activities

The mere widening of the income distribution as developmentoccurs is not as much a concern as what happens to income levels of thepoor Neither the level nor the distribution of income will be improvedfor the poor in most countries unless they have improved access to as-sets such as land and education which can make their primary assetlabor more productive during the growth process Development strat-egies that increase employment opportunities and promote the supplyof wage goods (mainly food) will have the best chances for reducingpoverty under virtually all circumstances

Private versus PublicThe appropriate mix of public and private activity varies by countryand by sector Some services are almost always best funded throughthe public sector such as an independent judicial system and roads


126


These are public goods whose provision is limited by free rider prob-lems people can benefit without paying so government interventionis needed to force everyone to pay a share of their costs Other activitiescan be funded voluntarily through private activity but must be regu-lated by the public sector or they will be provided inefficiently

Activities that are typically regulated by government if not pro-vided directly in the public sector include natural monopolies such aswater supplies or services with positive externalities such as sanitationand health Too little of these services would be provided by privatefirms if they were not regulated in some way by government On theother hand unregulated firms would provide too many goods that gen-erate negative externalities such as pollution

The outcome of interactions between the public and private sec-tors is often determined not by who does what but by the degree oftransparency and accountability in what they do Private firms that canbe held accountable to their investors and customers tend to work effi-ciently as do public institutions that are accountable to voters and tax-payers Either kind of institution can become corrupt and inefficient inthe absence of appropriate checks and balances within and betweeneach sector

A useful way to explain the degree of accountability in theeconomy over both public and private institutions is through the rela-tive size of transaction costs in the market or political system Lowertransaction costs typically make either system more accountable to alarger number of people Easier transactions between customers andsuppliers make the market more efficient and easier transactions be-tween citizens and their government usually make the public sectormore efficient

A range of institutional arrangements can keep transactions costslow and sustain checks and balances over time Private markets mustbe regulated by public institutions and the public sector must be keptaccountable to the private individuals Otherwise even if new tech-nologies are available growth can be hindered by an inefficient or in-equitable institutional structure

Many examples of insufficient institutional structures exist in theworld In developing countries these inefficient or insufficient institu-tions constrain economic growth continually and contribute to short-term economic crises In developed countries they also can cause peri-odic problems such as the recent financial crisis that was facilitated bylax financial regulations with limited oversight Achieving the appro-priate balance of institutional efficiency and accountability is difficultbut critical for economic development

127

SUMMARYThe classical model of economic growth stressed the importance of di-minishing returns to labor as a constraint to growth and the mid-twen-tieth-century Solow model stressed diminishing returns to capital Con-temporary experience however shows how countries with institutionsthat reward innovation can sustain rapid economic growth far beyondthese constraints

Growth-stage theories attempted to categorize the growth processinto successive stages through which countries must pass as they de-velop Dual-economy models focused on movement of labor out of ag-riculture and how the agricultural transformation can be smoothed bybalanced growth in both sectors Dependency theorists argued thatdeveloping countries became increasingly exploited as they becomemore integrated into world markets and so should withdraw into self-sufficiency Each of these classes of theories provides some insights intothe development process but does not provide a comprehensive theoryof growth and development

Contemporary development strategies recognize the role of agri-culture as an engine of economic growth Agricultural growth frees uplabor and other resources that can be used in other sectors It helpsalleviate poverty by improving food availability and stimulating broad-based employment growth Most economists agree that internationaltrade should be kept relatively open and that governments should pro-vide public goods promote innovation regulate monopolies and makemarkets more efficient The exact development strategy for each coun-try depends on its resource mix stage of development and institutionalstructure New institutional arrangements will have to be designed inmany countries to enhance information flows and lower transactionscosts to make markets more efficient and promote accountability inthe public and private sectors

IMPORTANT TERMS and CONCEPTSAccountability lmport substitutionCapital-led growth Income distributionCenter and periphery Institutional arrangementsClassical model Integrated rural developmentComparative advantage Labor-surplus dual-economyDependency theory Open versus closed economyEmployment-led growth Public goodExport-led growth Stage of developmentGrowth stage theory Terms of tradeGrowth versus equity Transactions costsHarrod-Domar model


128

Looking AheadIn this chapter the roles of agriculture in economic development werementioned along with the need for countries to have development strat-egies In much of the rest of the book we will be examining how todevelop the agricultural sector itself Before we do that however it isimportant to discuss the nature of existing agricultural systems in de-veloping countries In the next chapter we discuss the characteristicsof traditional agriculture and agricultural systems

QUESTIONS for DISCUSSION1 What is the major factor that is hypothesized to constrain economic

growth in the classical model2 What are the major features of the labor-surplus dual-economy

model and what are its primary weaknesses3 Why might the wage rate eventually increase in the industrial

sector in the labor-surplus dual-economy model4 What implications does technological change in the agricultural

sector have in the labor-surplus dual-economy model5 What is the distinguishing feature of dependency theories What

are the policy implications of dependency theories6 Why is agricultural development important in most developing

countries7 What is employment-led growth and why is employment impor-

tant to development8 What are the arguments for and against inwardversus outward-

oriented development strategies9 What are the three general approaches that have been suggested

for alleviating abject poverty10 Why might both the private and public sectors have important

roles to play in development

RECOMMENDED READINGSHayami Yujiro and Vernon W Ruttan Agricultural Development An

International Perspective (Baltimore Johns Hopkins University Press1985) Chapter 2

North Douglas ldquoInstitutions Transactions Costs and EconomicGrowth Economic Inquiry vol 25 1987 pp 415ndash8

Olson Mancur Jr ldquoBig Bills Left on the Sidewalk Why Some NationsAre Rich and Others Are Poorrdquo Journal of Economic Perspectives vol10 Spring 1996 pp 3ndash24


129

PART 3

Agricultural Systems

and Resource Use

Traditional farm in Nepal

130

PAPART 3 mdash AGRICULTURAL SYSTEMS AND RESOURCE USE

131

CHAPTER 7

Agriculture

in Traditional SocietiesIn low-income countries peasant agriculture tends to be character-

ized by low levels of utilization of certain resources low levels of pro-

ductivity and relatively high levels of efficiency in combining resources

and enterprises mdash John W Mellor1

This Chapter1 Describes the common characteristics of traditional agriculture2 Discusses how traditional farms make decisions about their

livelihoods3 Discusses implications of characteristics of traditional farming

systems for agricultural development

CHARACTERISTICS of TRADITIONAL AGRICULTUREThe world food-hunger-poverty problem is serious and solutions de-pend in part on agricultural development Before considering how tofoster development one needs knowledge of the nature of agriculturein developing countries Without this knowledge it is difficult to un-derstand the steps needed to stimulate agricultural development andhow these changes will affect the people involved In this chapter weexamine several general characteristics of traditional agriculture Thenin Chapter 8 we compare specific types of agricultural systems in vari-ous stages of development2

The term traditional agriculture conveys part of its own meaningThe word ldquotraditionalrdquo means ldquoto do things the way they have usually

1 John W Mellor Economics of Agricultural Development (Ithaca NY Cornell Univer-sity Press 1966) p 134

2 Agricultural systems include production practices or how things are produced aswell as the types of enterprises or what things are produced

132

PART 3 ndash AGRICULTURAL SYSTEMS AND RESOURCE USE

been donerdquo Because natural resources culture history and other fac-tors vary from place to place the way things have usually been donealso differs greatly from one location to another And because condi-tions change no type of farming system no matter how traditional isever completely stable In fact one of the major challenges to agricul-tural development is to stimulate improvements in production prac-tices and introduce higher value products to raise incomes over timeTo do so we need to understand the common characteristics found intraditional agriculture

Livelihoods and the Intermixing of Farm and Family

DecisionsTraditional agriculture takes several forms but small farms predomi-nate in most developing countries Farm families have access to manytypes of assets including human labor land physical capital such asequipment financial capital natural assets and social and political as-sets Farmers make decisions about how to use their assets in produc-tion labor supply consumption and other activities and these deci-sions reflect their ldquolivelihood strategiesrdquo Production and consumptiondecisions are generally intermixed on traditional farms For examplein remote areas in Bolivia farmers produce a number of potato variet-ies some for sale However some varieties are needed for families andguests during festivals these varieties are often not available in localmarkets The cultural requirement that such varieties should be avail-able at these times affects household planting decisions The impor-tance of the family and the close relationship between production andconsumption decisions occur because much of the labor managementand capital come from the same household A sizable proportion of theproduction is consumed on the farm or at least in the community whereit is produced Success in the farm enterprise may enhance nutritionalstatus which can in turn lead to higher productivity

Labor and Land UseTraditional farms generally are very small usually only 1 to 3 hectares(about 25 to 75 acres) Labor applied per hectare planted howevertends to be high In many areas land is a limiting factor and is becom-ing more limiting over time as populations continue to grow Labor isoften underemployed at certain times of the year while capital assetsare fully exploited Much sharing of work and income occurs on tradi-tional farms so there is little open unemployment during slack timesThis sharing means that the individualrsquos wage may be determined bythe average rather than the marginal productivity of labor as mentioned

133

CHAPTER 7mdash AGRICULTURE IN TRADITIONAL SOCIETIES

BOX 7-1

KEFA VILLAGE in EASTERN ZAMBIAThe anthropologist Else Skjonsberg visited Kefa Village first in 1977 and

several times since Her book Change in an African Village Kefa Speaks

portrays a traditional agricultural system in Eastern Africa Villagers in Kefa

depend on land which is controlled and allocated by the local chief Some

inherit cultivation rights from their parents others request unused land from

the chief and others borrow land from relatives and neighbors When land

shortages arise groups of villagers break away and search other areas for

unused lands

Households cultivate 1-4 hectares with maize groundnuts sweet

potatoes and pumpkins produced for own consumption and tobacco and

cotton produced for sale Fortunate farmers have access to wetland

dambos where they grow vegetables year-round The agricultural year

starts before the first rains in October when the ground is broken by hand

hoes Maize the most important food crop is planted first weeded first

and harvested first Most villagers plant open-pollinated maize varieties

which have been used for generations Maize is stored in granaries and in

years of abundance it is used to brew beer or sell Groundnuts are rotated

with maize to maintain soil fertility and provide dietary protein Hybrid maize

varieties with higher yields and shorter growing seasons have been intro-

duced but most Kefa villagers are suspicious of their quality and only pro-

duce them for sale Hybrids require purchased fertilizer and in dryland

farming exposure to risk invites trouble Many believe use of fertilizers will

breed dependency and bring ruin to adventurous farmers

Family members share work responsibilities Women prepare meals

carry them to the fields hand-cultivate all day then return home with pots

and pans loads of firewood and water During December and January the

women take responsibility for weeding It takes as long as three weeks to

weed a hectare of maize so family time is fully occupied On rainy days

men make repairs around their huts while women manage household af-

fairs When labor is scarce some mobilize workers by throwing home-

brewed beer parties others trade labor and work together During April

through June labor is in short supply and entire villages participate in har-

vests Women are chiefly responsible for harvest but men and older chil-

dren assist Women headload food crops in 50 kilogram bags from the

fields to storage bins In rare cases where oxen or motorized transport is

used men take responsibility for the task

Although agriculture is the main source of well being in Kefa all house-

holds are engaged in non-agricultural activities Some brew and sell beer

others practice crafts such as weaving or woodworking many engage in

petty trading and others are healers scribes or have specialized skills

Cattle raising and off-farm incomes supplement farm incomes and help

families buy farm and household equipment clothes and blankets and

134


pay for services such as school fees Off-farm activities are divided by

gender women brew and sell beer trade and weave while men more

often have specialized skills work with wood or do repairs Incomes earned

in these activities are held separately by men and women and women are

eager to engage in such activities because the money they earn provides

them a degree of autonomy in decision making

Families in Kefa are structured in different ways Only about half of the

households are nuclear in the sense of two parents and children About a

third of households are headed by women some divorced or widowed

some whose husband is absent Children participate actively in household

economic life by age 5 most contribute to household tasks and past 8

years farmwork increases Boys are responsible for tending cattle while

girls assist their mothers in the house and care for younger siblings Most

children attend schools but are excused during periods of peak agricul-

tural labor The elderly live with their families or are cared for by family

members The poorest of the poor have few relatives and depend on hand-

outs from other villagers

BOX 7-1 continued

in Chapter 6 As a part of a diversified livelihood strategies familymembers often work off the farm part time sometimes on neighboringfarms sometimes in other areas as they seasonally migrate and some-times outside agriculture Petty trading often carried out by women isa common off-farm livelihood strategy in many countries

Although family labor is important traditional farms may hiresome labor at least during the busy times of the year Low wages causedby high underemployment in peasant agriculture create incentives tohire laborers That is traditional farmers can hire labor or buy a smallamount of leisure and enhance their social status at relatively low costThe people with the lowest economic and social status are usually notthe owners of small traditional farms but landless workers hired bythose farmers

SeasonalityLabor use in traditional agriculture varies seasonally along with agri-cultural cycles During slack seasons those immediately following plant-ing or preceding harvest labor may be abundant However during peakseasons especially during weeding and harvest labor can be in shortsupply Wages often exhibit similar seasonal fluctuations The seasonalnature of agricultural production causes variations in consumption and

135


nutritional status particularly in African settings Because storagefacilities may be lacking and mechanisms for saving and borrowingincomplete consumption patterns can follow agricultural cycles Itis common to find lsquolsquolean seasonsrdquo when consumption is low andshort-run malnutrition high especially immediately prior to harvest(see Box 7-2)

BOX 7-2

SEASONAL MIGRATION A RATIONAL RESPONSESeasonal weather patterns cause traditional farmers to adopt production

and consumption patterns to help smooth variations Seasonality also in-

duces migration as people search for employment opportunities and food

Other seasonal causes of migration are trade and marketing cultivation of

secondary landholding and pasturing cattle Seasonal migration is a world-

wide phenomenon In some rain-fed areas of Africa 30 to 40 percent of

the economically active population migrates while in rural Nepal as much

as 30 percent of the households have at least one member who migrates

Why does seasonal migration occur During the lean season labor

demands on the farm are low incomes are stretched and food can be in

short supply Other rural regions may have crop conditions (due to environ-

mental factors technologies or irrigation) that alter the agricultural calen-

dar and create counter-cyclical demands for workers Large plantations

commonly producing many export crops also demand labor on a seasonal

basis Seasonal rural-to-urban migration involves workers migrating to

towns cities and mines in search of work These reasons combine to

push migrants out of regions where their labor is temporarily in surplus and

pull them into areas with high demands for labor

Seasonal migration is not inefficient nor is it caused by factors such as

imperfect labor markets It is a natural adaptation to highly seasonal agri-

cultural cycles and can smooth family incomes and consumption Sea-

sonal migration also provides insurance in the event of a crop failure fam-

ily income can be maintained in the short-run by migration

Seasonal labor flows have benefited countries by minimizing labor

shortages in harvest times Exports of cocoa and coffee from forest re-

gions of Western Africa are largely made possible by seasonal migrants

who provide labor during harvest Other regions of the world have seen

their total production possibilities shift outward as labor moves to fill sea-

sonal gaps

Source Material was drawn from David E Sahn ed Causes and Implications of

Seasonal Variability in Household Food Security (Baltimore Johns Hopkins

University Press 1987)

136


Productivity and EfficiencyTraditional farms are characterized by low use of purchased inputs otherthan labor Yield per hectare production per person and other mea-sures of productivity tend to be low These factors do not mean how-ever that traditional farms are inefficient As T W Schultz points outtraditional farms tend to be poor but efficient3 Why

The crop varieties power sources methods for altering soil fertil-ity and certain other factors available to traditional farms constrainproductivity growth and hence reduce returns to labor and traditionaltypes of capital Efficiency as measured by equating marginal returnsto resources in alternative uses is often high In other words given thetechnologies available to traditional farmers they tend to do a good jobof allocating labor land and other resources The implication is thatjust reallocating the resources they currently have will not have a majorimpact on output

It makes sense that with static levels of technology physical con-ditions and factor costs farmers would gradually become very effi-cient at what they do When conditions change rapidly many of themistakes in resource allocation occur Also one must be careful not toequate limited education (another common characteristic in traditionalagriculture) with lack of intelligence

A situation with low use of certain inputs low productivity buthigh economic efficiency under static conditions has important impli-cations if productivity is to be increased First new technologies canhelp to change the production possibilities available to farmers Sec-ond investments to improve the quantity and quality of productiveassets such as land can stimulate income growth Third education maybe needed to help farmers learn to adjust resource use to changing con-ditions so as to maintain their high levels of efficiency However underthe static conditions of traditional agriculture education will do littleto improve productivity since peasant producers are already relativelyefficient

Rationality and RiskTraditional farmers are economically rational They are motivated toraise their standard of living while of necessity they are cautious Tra-ditional farmers are not adverse to change but proposed changes mustfit into their farming systems without altering too abruptly the meth-ods they have developed over time to reduce risk and spread out labor

3 Theodore W Schultz Transforming Traditional Agriculture (Chicago University ofChicago Press 1964) p 38

137


use Traditional farmers face many risks including weather-relateduncertainty agricultural pests and diseases price and market-relatedrisks and human health risks Decisions often reflect attempts to man-age this risk Because formal risk management mechanisms such as in-surance are often not available traditional households turn to informalmechanisms in response to a risky environment4

One mechanism by which traditional farmers spread risk is byexchanging labor and other resources through joint and extended fami-lies By joint and extended families we mean relatives (and sometimesfriends) beyond parents and their children In many countries a sub-stantial degree of sharing labor and goods occurs among friends andneighbors which not only adds to social status but spreads risk Recip-rocal agreements to assist others in times of need can spread risk acrossspace through agreements with people facing other agro-ecologicalconditions or in different regions across economic sectors throughmigration and work choice and across time through inter-generationalsharing Some of these informal arrangements may deteriorate as de-velopment proceeds creating a need for new institutional arrangementsto manage risk

Another risk-spreading mechanism is reliance on diversified live-lihood strategies Traditional farmers frequently plant multiple cropson a single plot of land in a single season For example maize and beansare planted together throughout Latin America in Africa maize is in-tercropped with sweet potatoes groundnuts and other foods depend-ing on the location Intercropping reduces reliance on success in a singlecrop and helps manage risk Off-farm employment further diversifiesincome sources

Off-farm EmploymentBecause agriculture is so visible in developing countries it is easy toassume that rural dwellers are only farmers In reality in most coun-tries off-farm income is an important source of earnings especially forthe rural poor Many landless and near-landless families provide laborto other farmers these agricultural labor markets are described in moredetail in Chapter 13 Others work in non-agricultural enterprises someare self-employed producing goods and services for sale Non-farmemployment involves small-scale rural manufacturing transport ser-vices and petty trading Income from these enterprises helps offset

4 See Paul B Siegel and Jeffrey Alwang An Asset Based Approach to Social Risk Manage-ment SP Discussion Series 9926 Human Development Network Social ProtectionUnit the World Bank Washington October 1999

138


fluctuations in earnings from agriculture representing a risk-manage-ment strategy It can smooth intra-year variations in on-farm labor de-mands Rural non-farm employment accounts for about 35ndash30 percentof income across the developing world5 Non-farm income is particu-larly important for women who can combine their household obliga-tions including child care with work The percentage of rural workersin the non-farm sectors varies from country to country but generally isin the range of 20ndash50 percent6 Between 1960 and 1990 in Asia the pro-portion ranged from 67 percent in Taiwan to 20 percent in China Off-farm employment is a higher proportion of total employment in Asiaand Latin America than in Africa but even in Africa it exceeds 60 per-cent in countries such as Botswana and Swaziland

THE ROLES of LIVESTOCKLivestock play many vitally important roles in traditional farming sys-tems roles that are sometimes misunderstood by outsiders Since about60 percent of the poor in sub-Saharan Africa and Asia are dependent onlivestock for some part of their livelihoods7 there is need to improveanimal productivity in developing countries Livestock systems canplace pressure on the environment while environmental stress andchange has important implications for small-scale producers There islittle doubt that when crops and livestock directly compete for the sameresources it is usually more efficient for humans to consume grain thanit is to feed the grain to livestock and consume meat However in mosttraditional farming systems livestock consume little grain Letrsquos con-sider several roles of livestock and some of the factors leading to changein livestock production systems

Buffers and Extenders of the Food SupplyFarm animals provide a special protection to farm families acting as abuffer between the family and a precarious food supply Animals are

5 See Steven Haggblade Peter Hazell and Thomas Reardon Strategies for StimulatingPoverty-Alleviating Growth in the Rural Nonfarm Economy in Developing Coun-tries EPTD Discussion Paper No 93 International Food Policy Research Institute 2002

6 See Nurul Islam ldquoThe Nonfarm Sector and Rural Development Review of Issuesand Evidencerdquo 2020 Discussion Paper Number 22 International Food Policy ResearchInstitute 1997

7 D Thomas and D Rangnekar ldquoResponding to the increasing global demand foranimal products implications for the livelihoods of livestock producers in devel-oping countriesrdquo in Responding to the Livestock Revolution The Role of Globalisationand Implications for Poverty Alleviation ed E Owen T Smith M A Steele S Ander-son A J Duncan M Herrero J D Leaver C K Reynolds I Richards J C Ku-VeraBritish Society of Animal Science Publication 33 Nottingham University Press 2004

139


like a savings bank and an insurance plan Farmers can invest in themthey grow and they can be consumed or sold during crop failures Inmost traditional agriculture livestock do not directly compete with cropsbecause they eat crop residues feed off steep slopes and poor soils andconsume materials which ldquoextendrdquo the food supply Many are rumi-nants (eg cattle goats sheep and buffalo) eating grass and other for-ages that humans cannot and converting them to products for humanconsumption Livestock also make important contributions to the qual-ity of the diet by providing meat milk and eggs Small amounts ofthese high-protein nutrient-rich foods can have a significant impact onhuman health

Sources of Fertilizer Fuel Hides and HairAnimal manure is vitally important as a source of fertilizer and fuel inmany countries For example in the remote hills of Nepal it is difficultto obtain chemical fertilizer Animal manure increases soil fertility andadds organic matter In countries where wood is scarce animal dung isdried and burned for fuel Often these two uses of animal manure com-pete Dung that is burned cannot be used to increase soil fertility InIndia and other countries methane digesters have been developed andthe gas produced is used for cooking and the residual nitrogen appliedto crops

Few livestock products are wasted in traditional society Clothingand blankets are made from animal hides and hair of not only cattleand sheep but buffalo goats and other livestock

A cow is a type of savings bank in Kenya

140


Providers of Power and TransportIn many countries livestock are the principal source of power Theyplow the fields transport products to market and are used in process-ing tasks like grinding sugarcane Tractors are still relatively rare inmany developing countries The large investments needed to purchasetractors make them prohibitively expensive for traditional farmers Andon the steep slopes and rough terrain in parts of some developing coun-tries it will be many years if ever before mechanical power replacesanimal power

Social and Cultural SymbolsLivestock particularly cattle and goats are highly valued in some soci-eties for social and cultural reasons A familyrsquos social status may bemeasured by the number of animals it owns8 Cattle are given as giftsduring ceremonial occasions While livestock serve major economicfunctions they serve these other social and cultural functions as well

Changes in Livestock SystemsRapid urbanization and growing incomes in many developing coun-tries have been associated with increased demands for animal proteinsas a food source a phenomenon that has been named the livestock revo-lution9 Growing demand has raised meat prices and put pressure onglobal livestock systems10 While much of this demand will be met byindustrial producers traditional farmers can play a role This role isprobably strongest in the dairy sector as cheese can be produced on asmall scale Traditional farmers particularly those with access to graz-ing land can also benefit from increased prices of cattle and other ru-minants

An additional strain on livestock systems comes from climatechange which is discussed in more detail in Chapter 9 Although im-pacts of climate change will vary by location it is likely that substantial

8 In nomadic societies where no individual family owns the land animal ownership isalmost the only criterion available for measuring social status

9 C Delgado M Rosegrant H Steinfeld S Ehui and C Courbois ldquoLivestock to 2020the next food revolutionrdquo Food Agriculture and the Environment Discussion Pa-per 28 IFPRIFAOILRI Washington DC USA 1999

10 Scientists at the International Livestock Research Institute (ILRI) have identifiedthree main livestock systems agro-pastoral and pastoral systems where naturalresources are constrained and people adopt strategies to meet these constraintssmallholder crop-livestock systems where natural resources may be managed toimprove productivity and highly intensive industrial livestock systems

141


Farmer plowing with bullock in Thailand

temperature increases will occur in many areas with especially harshconsequences on tropical drylands where livestock grazing predomi-nates Feed resources in these areas will decline along with water avail-ability while increased temperatures will increase livestock consump-tion of already scarce water

A final challenge to livestock systems is related to their adverseimpacts on the environment As noted livestock often feed on steeplysloped and low-productivity lands As a result they contribute to lossof soil cover soil erosion and nutrient-laden run-off that pollutes sur-face water For example in many areas of Central America water qual-ity issues are tied to livestock grazing on fragile lands ground cover isbeing lost and erosion leads to siltation and bacterial pollution in riv-ers It is critically important that all these challenges to traditional live-stock producers be met through research and policy changes that in-crease productivity and reduce the pressure on fragile environments

IMPLICATION of TRADITIONAL FARMS for AGRICULTURAL

DEVELOPMENTDespite the common features described above one of the striking char-acteristics of farms in developing countries is their diversity How landis organized and controlled within farms gender roles ties to formalmarkets use of mechanical or animal traction institutional relation-

142


ships with respect to water rights and access to irrigation and manyother factors differ markedly across regions and sometimes within coun-tries Farms in much of Sub-Saharan Africa are still quite traditionalwhereas farms in many parts of Asia and the Pacific have begun to in-tensify and modernize In the next chapter we discuss factors that causelivelihood strategies and farming systems to change over time

Traditional farms are efficient but poor As population grows andless land is available per farmer poverty increases unless agriculturechanges as noted in Chapter 5 unless agricultural productivity growthoutstrips population growth rural poverty will increase over time Butchange brings additional risks and the danger of increasing income dis-parities The distribution of income generated through new plant vari-eties or power tillers can be affected by asset distribution patterns andinstitutions that govern the rules of behavior in society Risks must bemanaged and institutions that substitute for the historical sharing ar-rangements must be created Improved transportation systems areneeded to improve information flows and build market linkages

Several Asian countries face a need to alter their farming systemsand to diversify out of rice While rice will remain the dominant agri-cultural commodity vegetable and livestock production become increas-ingly attractive because of changing consumer demands as incomesgrow Additional education and non-farm employment opportunitiesbecome important elements in an overall development strategy Other-wise the law of diminishing returns will doom traditional farmers topoverty for the foreseeable future African farmers face problems of lowsoil fertility lack of access to markets and low opportunity costs oftime

As incomes grow in many developing regions consumer demandschange and the global economy will respond to these changes in de-mand Growth in meat and milk demand will put pressure on tradi-tional livestock grazing systems and policies may be needed to smooththe transition to more commercially oriented confinement and open-access grazing systems Without such policies market-based pressuresmay lead to social dislocation and environmental degradation in live-stock-producing areas

SUMMARYTraditional agriculture is diverse but traditional farms have some com-mon characteristics Traditional agriculture is generally characterizedby small farms with intertwined farm and family decisions Traditionalfarm families consume sell or trade most of their products locally Theirlabor use and land area per farm are small but labor input per hectare

143


is high Hired labor is often important These product and labor salesand purchases mean that farmers are in general closely linked to thelocal economy and respond to market signals Productivity and use ofpurchased inputs are low but efficiency is relatively high Traditionalfarmers are rational but risk averse They often live in extended or jointfamilies Livestock play many roles including extending the food sup-ply providing a buffer against poor harvests improving the quality ofthe diet generating fertilizer fuel hides and hair They also providepower and transport and meet social and cultural needs Traditionalfarms differ by region and as farms change some people particularlythe landless may be left behind unless new technologies are accompa-nied by improved institutions and education

IMPORTANT TERMS and CONCEPTSAsset distribution pattern Mixed croppingBiological technologies Off-farm employmentBuffers and extenders Poor but efficientDiversification Rational but cautiousIntermixing of farm and family decisions Role of livestockJoint and extended families SeasonalityLandless labor Semi-subsistence farmsLivelihoods Traditional agriculture

Traditional farmers in Bangladesh

144


Looking AheadA wide variety of agricultural systems are found in the world Thesesystems evolve over time In the next chapter we examine the factorsthat influence the type of farming systems found in a particular coun-try at a point in time The importance of technical human institutionaland political factors is discussed Several common types of agriculturalsystems are described and the significant roles of women and childrenare highlighted

QUESTIONS for DISCUSSION1 Why might traditional farms be fairly conservative or slow to

change from current practices2 Are traditional farms subsistence farms What is meant by ldquosubsis-

tencerdquo3 Why are livestock important in many traditional farming systems4 Distinguish between productivity and efficiency Why do tradi-

tional farms tend to have high levels of efficiency Why do theytend to have low or high levels of productivity

5 What factors influence resource allocation on traditional farms If afarmer fails to adopt a new apparently more profitable farmingpractice is he or she irrational

6 If traditional farmers use resources efficiently why should we beconcerned with raising productivity by increasing the use of newtechnologies

7 Are the farmers who own 1 to 3 hectares the poorest people in ruralcommunities in developing countries

8 Why are joint and extended families still important in many devel-oping countries

9 Why are farm and household decisions often inseparably linked indeveloping countries

10 Why are institutional changes often as important as technologicalchanges for agricultural development

11 Why do farmers practice mixed cropping Are agricultural diver-sification and mixed cropping synonymous

12 Why is hired labor often important in traditional or semi-subsistence agriculture

13 Why are new biological technologies often more important thannew mechanical technologies for fostering agricultural develop-ment

14 Why is agricultural diversification becoming increasingly impor-tant in many Asian countries

145


RECOMMENDED READINGSDixon John and Aidan Gulliver with David Gibbon Farming systems and

poverty improving farmersrsquo livelihoods in a changing world (Rome and Wash-ington DC FAO and the World Bank 2001)

Ellis F Rural Livelihoods and Diversity in Developing Countries (Oxford Ox-ford University Press 2000)

Hayami Yujiro Anatomy of a Peasant Economy A Rice Village in the Philip-pines (Los Banos Laguna Philippines International Rice Research Insti-tute 1978)

Hopper W David ldquoAllocation Efficiency in a Traditional Indian Agricul-turerdquo Journal of Farm Economics vol 47 (1965) pp 611ndash25

Norman David W ldquoEconomic Rationality of Traditional Hausa DrylandFarmers in the North of Nigeriardquo in Robert D Stevens ed Tradition andDynamics in Small-Farm Agriculture (Ames Iowa State University Press1977)

Schultz Theodore W Transforming Traditional Agriculture (New HavenConn Yale University Press 1964)

Siegel Paul and Jeffrey Alwang An Asset Based Approach to Social RiskManagement SP Discussion Series 9926 Human Development NetworkSocial Protection Unit the World Bank Washington October 1999

Skjonsberg Else Change in an African Village Kefa Speaks (West HartfordConn Kumarian Press 1989)

Wolgin J M ldquoResource Allocation and Risk A Case Study of SmallholderAgriculture in Kenyardquo American Journal of Agricultural Economics vol 54(1975) pp 622ndash30

146


CHAPTER 8

Agricultural Systems and

Their Determinants

The agricultural pattern that has emerged in each area is in part the

result of ecological factorsmdasha particular combination of climate and

soilmdashand in part the result of economic and cultural factors in the

society that grows the crops mdash Robert S Loomis1

This Chapter1 Identifies factors that influence the agricultural systems found in a

particular country at a point in time2 Explores the differences in farming systems found in various parts

of the world3 Presents economic concepts that help explain input and output

choices in farming systems

MAJOR DETERMINANTS of FARMING SYSTEMSFarming systems in each region of the world show considerable vari-ety and are differentiated by how production is organized by the na-ture of technologies employed and by the types of crops and livestockproduced Each system consists of a small number of dominant crops(or livestock) and numerous minor crops (or livestock) We must un-derstand agricultural systems if we are to improve them therefore letrsquosexamine the primary determinants of the prevailing systems before clas-sifying and describing them

Technical institutional and human factors affect the type of agri-cultural system that predominates in a region These factors interact ateach location and point in time to provide a unique environment foragricultural production (see Figure 8-1) When these factors remain con-stant for several years the farming system that evolves represents along-term adaptation to that environment Different farming systems

1 Robert S Loomis ldquoAgricultural Systemsrdquo Scientific American September 1976 p 69

147

CHAPTER 8 mdash AGRICULTURAL SYSTEMS AND THEIR DETERMINANTS

Fig

ure

8-1

M

ajo

r d

ete

rmin

an

ts o

f th

e fa

rmin

g s

yste

m a

t a

po

int in

tim

e

148


have different needs for public support such as infrastructure legalsystems market-related rules and norms They also have different im-pacts on the natural environment Economic development can intro-duce rapid changes in underlying factors thus placing pressure on asystem

Technical Determinants of Farming SystemsTechnical elements including both physical and biological factors helpdetermine the potential types of crop and livestock systems Physicalfactors mdash including climate land water access capital items and dis-tance to markets mdash are unique to each location although water accessand other capital items can be altered through investments and newtechnologies Similarly investments in roads alter the relationship be-tween physical distance and travel time For example the nomadismdiscussed below that prevails in many arid regions of the world rep-resents an adaptation to harsh climates However the introduction ofwells has encouraged more settled farming or ranching in parts of no-madic areas Global climate change is likely to have a profound effecton farming systems and we are already seeing adjustments to agricul-tural practices as weather patterns and temperatures change

Biological factors including pests and crop and livestock varietiesare even more susceptible to modification In the short-run howeverthese factors play a major role in defining the prevailing agriculturalsystem The existence of the tsetse fly in areas of the African humidtropics has created farming systems that are dramatically different fromthose in similar climates where the fly does not exist Animal traction isnot an option in areas where the tsetse fly is common Technologies tocontrol the fly can help spread animal traction and alter traditional farm-ing relations

Institutional and Human Determinants of Farming SystemsInstitutional and human elements influencing farming systems are char-acterized by both exogenous (externally controlled) and endogenous(internally controlled) factors Factors largely outside the control of in-dividual farmers include social and cultural norms and beliefs histori-cal factors population density market opportunities and marketingsystems and off-farm employment opportunities For example highpopulation densities in many South Asian countries are partly respon-sible for the very different farming systems there as compared to thesystems found in the relatively low-density areas of sub-Saharan Af-rica and Southeast Asia

149


Politically determined institutions such as pricing policies creditpolicies macroeconomic policies trade policies and land-tenure sys-tems affect the farming system Land ownership is highly skewed inmany countries In areas of Central America for example large com-mercial farms and plantations exist alongside small peasant subsistenceand semi-subsistence farms The farming practices used in these areasare significantly influenced by the distribution of land plantations relyon landless and small holding workers as suppliers of labor and thelaborers mix off-farm incomes with food crops grown on their ownholdings These small holders adopt diversified livelihood strategieswithin the overall context of their farming system The prevailing pat-terns of land uses crops produced and technologies on different-sizefarms is clearly affected by the distribution of land holdings In manyareas of the world people have only use-rights over the land they farmIn much of Africa for example families are given land to farm but theycannot rent or sell it to others and cannot use it as collateral for creditSuch land-use institutions influence incentives for investments in landimprovements which in turn influence the prevailing farming sys-tem The political system itself may dictate collectives communes orprivate property as the primary means of organizing land use in agri-culture

Endogenous or farmer-controlled determinants of agricultural sys-tems include family labor management ability education knowledgeas well as the goals for which farmers are striving Investments in edu-cation affect the value of time used on and off the farm and as educa-tional levels change farming systems change in response The risk as-sociated with agricultural production particularly in arid rain-fed re-gions has forced farmers to adapt their practices to ensure survivalThese adaptations are determined in part by the farmersrsquo degree ofrisk aversion which is affected by income education etc Any of theseexogenous or endogenous factors can change over time New technolo-gies and population growth are two particularly important determi-nants of how and in what direction agricultural systems change overtime

MAJOR TYPES of FARMING SYSTEMSWhile the specific type of farming system in use depends on a largenumber of factors (see Figure 8-1) many years ago Duckham andMasefield grouped farming systems into three basic types shifting

150


cultivation pastoral nomadism and settled agriculture (Fig 8-2)2

Settled agriculture includes many subtypes Letrsquos briefly examine eachof these systems

Shifting CultivationShifting cultivation is an old form of agriculture still practiced in manyparts of the world As the name implies it involves shifting to a newpiece of land when the fertility of the original patch runs out or whenweeds and other pests take over The movement may be fast or slowand animal manure may extend the use of one location Migration fromone piece of land to another may be random linear or cyclic Whencyclic the rotation frequency can last as long as 30 to 45 years

Shifting cultivation also has been called slash and burn because usu-ally new areas are cleared by slashing the brush with a machete andburning it to clear the fields and release nutrients into the soil Capitalinvestment in the farm is low with machetes digging sticks and hoesbeing the primary tools Typical crops include corn millet and sorghumrice and roots Usually the crops are mixed Shifting cultivation is stillpracticed on about 15 percent of the worldrsquos exploitable soils particu-larly in Africa and Latin America It is popular where population pres-sures are not too severe

Shifting cultivation is frequently associated with insecure controlover the land either because of absentee government or unclear own-ership status It has been linked to soil erosion and other environmen-tal problems in several developing countries partly because there arefew incentives to invest in practices that maintain soil fertility

Pastoral NomadismPastoral nomadism involves people who travel more or less continu-ously with herds of livestock Pastoral nomads have no establishedfarms but often follow well-established routes from one grazing areato another Although probably only about 15 million pastoral nomadsare found in the whole world they move through an area almost aslarge as the entire cultivated area in the world They are especially preva-lent in the arid and semi-arid tropics Some examples include the Masaiof Kenya and Tanzania the Hima of Uganda the Fulani of West Africathe Bedouin of the Eastern Mediterranean and the nomads of Mongolia

2 See Alec N Duckham and G B Masefield Farming systems of the World (LondonChatto and Windus 1970) Substantial variation is observed within these highlystylized farming system typologies

151

Fig

ure

8-2

E

xa

mp

le o

f a

cla

ssific

atio

n o

f w

orl

d fa

rmin

g s

yste

ms


152


Pastoral nomadism can be total or partial In the latter case thenomads have homes and some cultivation for part of the year Typi-cally five or six families travel together with 25 to 60 goats and sheep or10 to 25 camels Sometimes they own cattle as well The livestock eatnatural pasture and their productivity is low

Pastoral nomadism is associated with a variety of problems Be-cause grazing takes place on common land there is a tendency for over-grazing because every individual farmer wishes to maximize his or hernumber of animals As the animal population increases grazing areasdeteriorate and incomes shrink This problem is known as the ldquoTrag-edy of the Commonsrdquo and ample evidence shows that traditional man-agement systems have evolved in response to it Little scope for techni-cal improvement exists in pastoral nomadic systems and serious prob-lems arise in years of drought As the human population grows addi-tional pressures are placed on the resource base supporting the nomadicsystem Global climate change presents an especially acute problem forpastoral nomad systems Increases in temperatures will reduce pastureproductivity and increase demand for water and both factors will lowerproductivity Accelerating desertification will result and will furtherlower productivity

Settled AgricultureSettled agriculture includes a variety of agricultural systems such asmixed farming systems intensive annual crops intensive and extensive

Nomads are common in the northern half of Africa(photo Mesfin Bezuneh)

153

livestock systems and perennial crops The dominant farming systemsresult from an enormous amount of human experimentation The sys-tems we see most often produce a relatively high and certain return instorable products per unit of effort They have spread from farmer tofarmer replacing other settled systems that are far less productive

Mixed farming usually involves a mixture of crops and livestockFew farming systems in developing countries consist of just one com-modity However what is meant by mixed farming is the integration ofcrops and livestock production As mentioned in Chapter 7 mixed farm-ing is common in traditional agriculture because it produces relativelyhigh returns while helping to manage risk makes efficient use of laborand land and helps maintain soil fertility

Intensive annual crops are extremely important in the world About70 percent of the cultivated area of the world is planted to the majorgrain crops which include wheat rice and corn Other important an-nual crops are barley millet sorghum roots tubers vegetables andpulses (such as beans peas and peanuts)

Perennial crops are grown and harvested over several years andinclude crops such as cocoa coffee bananas and sugarcane Some aregrown in large plantations but often on very small farms as well evenin the same country On small-scale farms perennial crops are ofteninterplanted with annual crops such as corn and beans Perennial cropstend to be high-valued and are frequently exported They also can helpprevent soil erosion and preserve biodiversity in ecologically fragileareas

Intensive livestock systems include both ruminants (for examplecattle buffalo sheep and goats) that produce milk meat fiber dungand other products and non-ruminants (for example pigs and poultry)that are particularly important for their meat and eggs These animalsare often fed grains in addition to pasture and forage In a few coun-tries intensive livestock systems involve carefully managed grasslandsor pasture

Extensive livestock systems include a variety of grazing systems onsemi-arid range high and cool mountain pastures wet lowlands andmore Livestock may graze on leaves as well as grass

In summary a large number of crop and livestock systems existmany of which have been relatively productive or at least well suitedto their environment As population expands and other conditionschange a particular system may no longer be adequate and is forced tochange (see Box 8-1) Few systems are static for very long today andseveral offer potential for improved productivity


154


BOX 8-1

POPULATION DENSITY AND AGRICULTURAL SYSTEMSThe intensity of land utilization varies worldwide and there is a close rela-

tionship between this intensity and the density of population in a particular

region Boserup hypothesized that pressure from increasing population has

caused a shift in recent decades from more extensive to more intensive

systems This classification scheme traces a continuum from shifting cul-

tivation to settled agriculture

1 Forest fallow cultivation one- to two-year planting of plots followed by

a 20- to 25-year fallow period

2 Bush fallow cultivation 6- to 10-year fallow period Periods of uninter-

rupted cultivation may be as short as 1 to 2 years or as long as 5 to 6

years

3 Short fallow cultivation fallow lasts one or a couple of years

4 Annual cropping land is left uncultivated only between the harvest of

one crop and the sowing of the next

5 Multi-cropping the most intensive system of land use the land bears

two or more successive crops every year

Boserup hypothesized that increased population densities put pres-

sure on food production systems to increase outputs Successively more

intensive systems require increased labor inputs for weeding and cultiva-

tion and more varied farming implements In forest fallow cultivation only

an axe is needed and as the fallow period is shortened implements such

as hoes plows and even irrigation systems are used

Different patterns of land use exist within similar agro-climatic zones

For example the land used for intensive cultivation in parts of Nigeria is

remarkably similar to the land used for long fallow cultivation in the same

country Thus Boserup concluded that humans not only adapt to the cli-

matic conditions they face but actually change the relationship between

the conditions and agricultural output by using methods that enhance soil

fertility These adaptations are mostly influenced by rates of population

growth

Source Ester Boserup The Conditions of Agricultural Growth (London Allen

and Unwin 1965) especially Chapter 1 pp 15-22

The Influence of the Political SystemIn Fig 8-1 political factors were listed as significant determinants offarming systems including land tenure systems The political systemcan dictate how property rights are allocated including collective com-mune and other types of land tenure arrangements When systems suchas collectives and communes restrict individual farmersrsquo responsibilities

155

and rights to manage farm resources in response to market signals theresult has usually been inefficiency and waste of those resources Po-litical systems that allow independent family farms to operate in com-petitive markets have generally yielded higher productivity levels andfaster growth rates over time A particularly important example of thisis the reform of communist Chinarsquos collective land tenure system

Beginning in 1979 China allowed individual farmers to respondmore freely to market incentives and since then has experienced sig-nificant increases in agricultural production (see Box 8-2) Adoption ofnew technologies and use of purchased inputs such as fertilizer haveincreased substantially These changes have occurred rapidly in Chinacausing important changes in world markets Remember that Chinahas more than 13 billion people Agricultural growth in China has overtime stimulated broad-based increases in income and this incomegrowth will have profound implications for food markets such as in-creased demands for animal proteins A challenge for the world foodsystem is to make adjustments to meet these emerging demands

Government policies other than rules governing land tenure alsoaffect farming systems Price policies that favor certain products overothers or promote the use of different inputs can have a strong impacton the types of crops planted on how long they are grown and even onthe degree to which traditional farmers interact with markets Policiesaffecting the value of the land create incentives for more or less invest-ments in land For instance policies that discriminate against agriculturesuch as export taxes are quickly reflected in lower values of agriculturalland Population and family planning programs can affect populationdensities which influence the nature of the agricultural system

In summary the major types of farming systems in the world in-clude shifting cultivation pastoral nomadism and several types ofsettled agriculture These systems particularly settled agriculture canbe affected in a major way by the political system in the country whichdictates private or public control over land use Other government poli-cies influence agricultural systems both directly and indirectly

ECONOMIC DETERMINANTS of INPUT USE and CROP and

LIVESTOCK MIXAs noted above policies can influence the evolution of farming sys-tems by changing relative prices of inputs and outputs Letrsquos examinemore carefully how economic factors affect the choice of inputs andmore broadly the type of farming system In Chapter 5 we introducedthe concept of an isoquant to illustrate that the same level of output can


156


BOX 8-2

CHINESE AGRICULTURAL SYSTEMSIn rural areas of China prior to 1979 the agricultural production system

was organized according to guidelines established in the national agricul-

tural plan Farming operations were organized into collective teams of 20

to 30 households these teams were required to sell fixed quantities of

output to the government at set prices Quantities produced in excess of

the quotas were also surrendered to the government The collectives had

some freedom to adjust inputs but the acreage planted to each crop was

determined by government planners

This rigid system led to stagnation in agricultural output Between 1957

and 1978 per-capita grain production grew at a 03 percent annual rate

while soybean and cotton production per capita declined respectively by

30 and 06 percent annually In 1978 rural incomes were virtually identical

to levels of 20 years earlier This poor performance of the agricultural sec-

tor had important implications in a country where 80 percent of the popula-

tion resides in rural areas

In 1978 the government decided to introduce the Household Respon-

sibility System which restored individual households as the basic unit of

farm operation Under this system a household leases a plot of land from

the collective and after fulfilling a state-set grain procurement quota can

retain additional output This output can be consumed or sold to the gov-

ernment The households have flexibility to determine acreage for indi-

vidual crops At the same time the government prices of agricultural com-

modities were increased and the prices paid for above-quota grain pro-

duction were increased substantially above quota prices Agricultural out-

put began to grow rapidly following these reforms and agricultural growth

averaged 6 per year from 1978ndash2003 These reforms led to a wholesale

change in the Chinese agricultural system by 1983 over 97 percent of the

collective teams in China had been converted to the new system

Sources Justin Y Lin ldquoThe Household Responsibility System Reform and the

Adoption of Hybrid Rice in Chinardquo Journal of Development Economics vol 36

(2) 1991 pp 353ndash73 Ehou Junhua ldquoEconomic Reform Price Readjustment

(1978ndash87)rdquo Chinese Economic Studies vol 24 (3) Spring 1991 pp 6ndash26

be produced with more than one combination of two inputs The con-cept of allocative efficiency relates to how well farmers choose the correctamounts of inputs to apply and outputs to produce given the availabletechnology assuming they are trying to maximize profits While farmand family decisions are inter-mingled their success and even survivaldepends in part on how efficiently they allocate their productive assets

157

Figure 8-3 Input efficiency given relative input scarcity

Efficient farmers are able to combine inputs in a way that reflects theirrelative prices Efficient farmers also choose the most profitable outputlevels The farming systems described in this chapter vary in terms ofintensity of input use and productivity but they all represent long-termadjustments to prevailing conditions As a result we can conclude thatthey are efficient As relative scarcity (and hence prices) of inputs andoutputs change these efficient producers will make adjustments to in-put mixes and amounts of output

In Figure 8-3 the curved isoquant represents the combinations oflabor and animal power that can be used to produce a specific amountof output with a given level of all other inputs for example two tonsof corn on one acre of land We expect all farmers to produce some-where along this curve Production to the right or above the curve woulduse more inputs than needed and would be technically inefficient Pro-duction to the left or below the curve is technically impossible giventhe other resources and technology available to the farmer The slope ofthe isoquant is known as the Marginal Rate of Technical Substitution(MRTS) between the two inputs In this case the isoquantrsquos slope is theadditional animal time needed to save one hour of labor time We ex-pect farmers to adjust their use of animals and labor until the value ofthat labor time just equals the cost of adding animal time In terms ofthe graph we expect farmers to adjust until the slope of the isoquant


158


just equals the price of labor relative to the price of animal power Thatratio is the slope of the relative price line also called an iso-cost linebecause it traces a line of constant total cost The economically efficientinput combination is the point where the isoquant and the isocost curvesare tangent or where the MRTS equals the input price ratio If the priceof labor goes down relative to the price of animal power the isocostline would become flatter tangency would occur at a point farther downthe isoquant and more labor and less animal power would be usedThus the drive to be efficient leads to changes in input mixes and overtime this drive can alter the farming system As an example comparedifferences in farming systems between Africa where labor is relativelyscarce and land is relatively abundant and South Asia where labor isrelatively abundant and land relatively scarce

Similar trade-offs occur between different kinds of output In Fig-ure 8-4 the curved line represents the production possibilities frontier (PPF)or the combinations of corn and beans that can be produced with avail-able resources As with Figure 8-3 we expect farmers to produce some-where along this curve Production inside the curve would generateless output than is possible and so be technically inefficient Produc-tion outside the curve would be technically impossible given these re-sources and the technology The slope of the PPF is known as the Mar-ginal Rate of Transformation (MRT) In this case that slope is the amountof additional corn that can be produced with one less unit of beansAgain the allocatively efficient combination of outputs depends on therelative prices of these two outputs For example if the price of beansrises relative to the price of corn the iso-revenue line becomes steeperand it pays to shift more resources into producing beans and away fromcorn

Input and output combinations observed in farming systemsaround the world are heavily influenced by technologies resource basesand relative prices Farmers allocate resources to maximize their fami-liesrsquo well-being taking into account expected costs and revenues Eco-nomic profitability is just one factor they consider in their decision-making but usually an important one

SUMMARYFarming systems in the world exhibit considerable variability Both tech-nical and human factors determine the types of farming systems Tech-nical factors include both physical and biological factors Institutionaland human factors are characterized by both externally and internallycontrolled forces The major farming systems of the world can begrouped into three classes shifting cultivation pastoral nomadism and

159

Figure 8-4 Output efficiency given the technology and resource base

settled agriculture Settled agriculture represents a variety of agricul-tural systems including mixed farming systems intensive annual cropsintensive and extensive livestock systems and perennial crops

IMPORTANT TERMS and CONCEPTSFarming systems Perennial cropsHuman determinants of Political determinants of farming farming systems systemsIntensive annual crops Production possibility frontierIso-costs and iso-revenues Settled agricultureMixed farming system Technical determinants of farmingPastoral nomadism systems

Looking AheadIn this chapter we briefly examined the nature and diversity of exist-ing agricultural systems in developing countries and determinants offarming systems In the next chapter we focus on environmental ornatural resource problems that can influence the ability of a farmingsystem to improve and achieve sustainable development


160

QUESTIONS for DISCUSSION1 What are the major technical determinants of farming systems2 Describe the major human determinants of farming systems Be sure

to distinguish exogenous from endogenous factors3 How might the political system affect the nature of the farming sys-

tem4 What is shifting cultivation and why is it more commonly found in

Africa and Latin America than in Asia5 What is pastoral nomadism and what problems might be present in

this type of system6 Distinguish among the major types of settled agriculture7 How do the optimal quantities of inputs and outputs change as iso-

cost and iso-revenue lines become flatter and why8 In what sense is the Boserup argument presented in Box 8-1 consis-

tent with the discussion of economic determinants of input use andoutput choice

RECOMMENDED READINGSDuckham Alec N and G B Masefield Farming Systems of the World (Lon-

don Chatto and Windus 1970)Lin Justin ldquoAgricultural Development in Chinardquo Chapter 31 in Carl K

Eicher and John M Staatz eds International Agricultural Development(Baltimore Johns Hopkins 1998)

Ruthernberg Hans Farming Systems in the Tropics (Oxford Oxford Uni-versity Press 1980)


161

CHAPTER 9

Resource Use and

Sustainability

hellippoverty compels people to extract from the ever shrinking remain-

ing natural resource base destroying it in the process In fact the

major characteristic of the environmental problem in developing

countries is that land degradation in its many forms presents a clear

and immediate threat to the productivity of agricultural and forest

resources and therefore to the economic growth of countries that

largely depend on them mdash Schramm and Warford1

THIS CHAPTER1 Examines the nature of environmental or natural resource prob-

lems that influence the sustainability of agricultural developmentin developing countries

2 Identifies the principal causes of environmental problems in devel-oping countries

3 Discusses some potential solutions to environmental problems indeveloping countries

NATURE of ENVIRONMENTAL PROBLEMSSound management of natural resources is widely recognized as essen-tial for sustainable agricultural and economic development Yet the ef-fects of environmental degradation and poor natural resource manage-ment are increasingly evident throughout the world The wide-rangingyet often interrelated problems of soil erosion silting of rivers and res-ervoirs flooding overgrazing poor cropping practices desertificationsalinity water-logging deforestation energy depletion climate change

1 Gunter Schramm and Jeremy J Warford eds Environmental Management and Eco-nomic Development (Baltimore Johns Hopkins University Press 1989) p 1

162


loss of bio-diversity and chemical pollution of land water and air areincreasing problems in many developing countries The poorest coun-tries tend to be most dependent on their natural resource base and thushave the potential of being the most vulnerable to environmental deg-radation These countries find environmental problems particularly dif-ficult to solve because rapid population growth outmoded institutionalrelationships poverty and a lack of financial resources conspire againstsolutions The poorest people within these countries usually suffer themost from environmental degradation

As agricultural and economic development occur forces are set inmotion some reducing and others increasing the pressures on the envi-ronment Changes in the rate of population growth new technologiessocial and institutional relationships the increased value of human timeand shifts in the weight placed on future as opposed to current incomeall influence the relationship between human activity and the environ-ment Economic and environmental policies together with other insti-tutional changes can either alleviate or aggravate natural resource prob-lems The nature of particular types of environmental problems isdiscussed below followed by a description of causes and potentialsolutions

Global Versus Local ProblemsMany environmental problems are local in cause effect and potentialsolution Others are regional or even global Problems such as erosionmay be local but also have more widespread implications if soil is de-posited in rivers and transported to neighboring regions and countrieswhere the silt raises river levels causing flooding Others such as defor-estation may appear local but can affect the global climate as carbon isreleased into the atmosphere Environmental problems affect every na-tion in the world can hinder the long run-sustainability of farming sys-tems and appear to be a growing concern The following is a brief de-scription of the more serious environmental problems facing develop-ing countries

Soil Degradation Erosion Silting and FloodingTopsoil is one of the worldrsquos most important natural assets Farmersfrequently invest in trying to improve it through soil fertility amend-ments and by using soil conservation techniques But these investmentsare costly and the poorest farmers are often unable to borrow money toundertake them and less willing or able to wait for the future benefitsthey provide As a result we observe that the lowest-income farmersoften draw down their ldquosoil capitalrdquo applying insufficient soil amendments

163

2 See Norman Meyers ldquoThe Environmental Basis of Sustainable Development ldquo inSchramm and Warford eds Environmental Management and Economic Developmentp59

3 See Alfredo Sfeirounis ldquoSoil Conservation in Developing Countriesrdquo Western Af-rica Projects Department World Bank Washington DC 1986

Farming an erodible hillside in Ecuador

to fully replenish the nutrients removed at harvest or generated throughnatural processes In effect they are ldquominingrdquo soil nutrients The re-sulting soil degradation is usually reversible if and when farmers findit profitable to apply more nutrients than plants withdraw

An irreversible kind of degradation is excessive soil erosion dueto the exposure of soil to wind and water runoff The extent of the worlderosion problem is difficult to assess because few nations have system-atically surveyed their soil resources Nevertheless the amount of agri-cultural land being lost due to soil erosion is estimated to be at least 20million hectares per year2 An erosion rate of 50 tons per hectare is com-mon in upland watersheds in many developing countries whereas soilcan regenerate somewhere between 0 and 25 tons per hectare3

A loss of 50 tons per hectare represents only about 3 millimetersfrom the top of the soil yet often the gullies and exposed bedrock fromuneven erosion scar the landscape The effects on productivity are po-tentially serious Eroded soils typically are at least twice as rich in nu-trients and organic matter as the soil left behind Soil nutrient lossescan be partially replaced by use of chemical fertilizers but only up to apoint and fertilizer can be expensive At any rate the yields with

CHAPTER 9 mdash RESOURCE USE AND SUSTAINABILITY

164


fertilizers are lower than they would be in the absence of erosion sothat erosion reduces productivity below its potential It is estimatedthat erosion of good soils in the tropics may be resulting in maize-yieldreductions of 10 to 30 percent4

Soils are seriously deteriorating in the hills of the Himalayas onthe steep slopes of the Andes Mountains in the Yellow River basin inChina in the Central American highlands in the Central Highlands ofEthiopia and on densely populated Java The worst erosion in terms ofaverage soil loss per hectare is found in the crescent from Korea to Tur-key in Eastern Europe and the former Soviet Union followed by theCentral American highlands and in the Sahel in Africa Differences aredue to the intensity of cultivation on highly erodible soils and avail-ability of soil conservation alternatives

The indirect or off-site effects of erosion through silting of riversand reservoirs are perhaps more serious than the on-site effects Whenreservoirs fill with sediment hydroelectric and irrigation storage ca-pacity is lost cutting short the useful lives of these expensive invest-ments When rivers silt up flooding occurs during rainy seasons Forexample soil erosion in the hills of Nepal causes flooding in the plainsof Nepal India and Bangladesh5 Flooding in the Yellow River basin inChina is another example

DesertificationExcluding real deserts potentially productive drylands cover about one-third of the worldrsquos land surface About one-sixth of the worldrsquos popu-lation lives in dryland areas that produce cereals fibers and animalproducts In arid regions with under 300 mm of annual rainfall vegeta-tion is sparse and nomadic herding of such animals as goats and cattlepredominates In semi-arid regions with 300 to 600 mm of rain dry-land farmers grow cereals such as wheat sorghum and millet in more

4 See Meyers The Environmental Basis of Sustainable Development ldquo in Schrammand Warford eds Environmental Management and Economic Development

5 While flooding is a serious periodic problem in many countries not all or even mostflooding is due to silt Low-lying countries such as Bangladesh and parts of EgyptIndonesia Thailand Senegal The Gambia and Pakistan are particularly vulner-able to flooding due to high river levels during the rainy season and sea surgesduring storms About 80 percent of Bangladesh for example is a coastal plain orriver delta In l998 approximately two-thirds of this country of 130 million peoplewas flooded While a certain amount of normal flooding can have a positive effecton agricultural production excessive flooding results in substantial loss of life fromdisease as well as drowning

165

Houses flooded in Dhaka Bangladesh

settled agriculture The semi-arid regions are smaller in area but moredensely populated than are arid regions

The term desertification applies to a process occurring in arid andsemishyarid regions Desertification involves the depletion of vegetativecover exposure of the soil surface to wind and water erosion and re-duction of the soilrsquos organic matter and water-holding capacity Inten-sive grazing particularly during drought years reduces vegetativecover the loss of vegetation reduces organic matter in the soil and thuschanges soil structure After a rain the earth dries out and becomescrusted reducing the infiltration of future rains Then even more veg-etation is lost for lack of water the surface crust is washed or crumblesand blows away leaving soil that is less fertile and unable to supportmuch plant life

Cropping particularly when very intensive and when combinedwith drought is another major cause of desertification If soil organicmatter is depleted by intensive farming practices and not replaced aprocess similar to that described above occurs As supplies of firewooddwindle people use dried manure for fuel rather than fertilizer As thesoil loses its fertility crop yields fall and wind and water erosion accel-erates Eventually the land may be abandoned

Moderate desertification may cause a 25 percent loss of pro-ductivity while severe desertification can reduce productivity by 50


166


percent or more It is estimated that 65 million hectares of productiveland in Africa have been abandoned to desert over the last 50 yearsDesertification is particularly a problem in the Sahel region of Africaand in parts of the Near East South Asia and South America In termsof people directly affected approximately 50 to 100 million people arecurrently dependent on land threatened by desertification Areas wheredesertification is a problem also tend to be areas with rainfall that isboth low and unpredictable The ensuing periodic droughts create short-term severe food crises in those areas

Salinity and WaterloggingIrrigation one of the oldest technological advances in agriculture hasplayed a major role in increasing global food production Howeverbringing land under irrigation is costly and degradation of irrigatedland through questionable water management practices is causing someland to lose productivity or be retired from production completely Themajor culprits are waterlogging and salinity

Seepage from unlined canals and heavy watering of fields in areaswith inadequate drainage can raise the underlying water table Almostall water contains some salts High water tables concentrate salts in theroot zones and also starve plants for oxygen inhibiting growth Inad-equate drainage also contributes to salinization when evaporation ofwater leaves a layer of salts that accumulate and reduce crop yields Atypical irrigation rate leaves behind about 2 to 5 tons of salt per hectareannually even if the water supply has a relatively low salt concentra-tion If not flushed out salt can accumulate to enormous quantities in acouple of decades

Estimates are that between one-quarter and one-half of the worldrsquosirrigated land is affected by moderate to severe salinization Some 20 to25 million hectares are affected in India 7 to 10 million hectares in Chinaand 3 to 6 million hectares in Pakistan Other developing areas severelyaffected include Afghanistan the Tigris and Euphrates river basins inSyria and Iraq Turkey Egypt and parts of Mexico

Deforestation and Energy DepletionForests play a vital role in providing food fuel medicines fodder forlivestock and building materials Tropical forests provide a home forinnumerable and diverse plant and animal species They protect thesoil recycle moisture represent a sink for atmospheric carbon dioxideand provide livelihoods for millions of human beings But forests arebeing cleared at a rapid rate During the 1980s about 15 million hect-ares of tropical forest were being cleared each year the rate has fallen

167

somewhat since then but today somewhere between 5 and 8 millionhectares per year are being lost6 The earthrsquos forested areas have de-clined by about one-half in the last century Deforestation continues ata rapid pace in countries such as Brazil Indonesia Mayanmar Zam-bia Tanzania and Nigeria These countries account for approximately60 percent of the Worldrsquos annual loss of tropical forests7

Deforestation creates environmental problems on land and in theair Forest clearing degrades soils and increases erosion in tropical wa-tersheds Soils in tropical forests tend to be fragile and unsuited forcultivation their fertility is quickly depleted as erosion follows the treeclearing In semi-arid areas deforestation contributes to loss of organicmatter increases wind and water erosion and speeds the rate of deser-tification As forests are burned to clear land carbon dioxide and car-bon monoxide are emittedinto the atmosphere contributing to climatechange It is estimated that more than 20 percent of the net increases toatmospheric carbon comes from deforestation

6 Freacutedeacuteric Achard Hugh D Eva Hans-Juumlrgen Stibig Philippe Mayaux Javier GallegoTimothy Richards Jean-Paul Malingreau ldquoDetermination of Deforestation Ratesof the Worldrsquos Humid Tropical Forestsrdquo Science 9 August 2002 vol 297 no 5583pp 999ndash1002

7 Food and Agricultural Organization of the United Nations 2006 Global Forest Re-sources Assessment Progress toward sustainable forest management FAO For-estry Paper 147 Rome 350 pp

Deforestation has led to soil erosion in Nepal


168


In developing countries seven out of ten people depend on fuelwood for meeting their major energy (cooking and heating) needs TheFAO estimates that three out of four people who rely on fuel wood arecutting wood faster than it is growing back When people cannot findfuel wood they turn to other sources of organic matter such as dungfor fuel thereby depleting soil fertility and aggravating soil erosionand desertification

Deforestation also threatens the worldrsquos biological diversity Tropi-cal forests cover only 7 percent of the worldrsquos landmass yet they con-tain more than 50 percent of the plant and animal species8 In Madagas-car for example there were until recently 9500 documented plant spe-cies and 190000 animal species most of them in the islandrsquos easternforest More than 90 percent of the forest has now been eliminated alongwith an estimated 60000 species9

Climate ChangeThe Earthrsquos climate is undergoing change Surface temperatures in-creased by 1oF during the 20th century and the 1990s were the hottestdecade of the century Projections of future increases range from 25oFto 104oF by 210010 Strong consensus now exists among the worldrsquos sci-entists that climate change is evident in shifts in ranges of flora andfauna earlier onset and lengthening of growing seasons and majorchanges in rainfall patterns Observed changes in abundance of plantand animal and changes in ecosystem compositions have been attrib-uted to climate change As world temperatures rise average sea levelsalso rise thus threatening coastal lands Violent storms monsoonsdroughts floods and generally increased weather variability are likelyAnd global climate change could alter disease prevalence and be veryhard on certain animal species because their ecosystem may shift whilethe property-line boundaries of their preserves do not

While there is some disagreement about the degree to which hu-man activities affect the rate of climate change it is clear that agricul-tural systems throughout the globe will feel its effects Impacts are likelyto vary substantially between regions In higher latitude areas agricul-tural productivity is predicted to rise with moderate temperature

8 See E O Wilson ldquoThe Current State of Biological Biodiversityrdquo chapter 1 in E OWilson ed Biodiversity (Washington DC National Academy Press 1988) p 8

9 See Robert Repetto ldquoManaging Natural Resources for Sustainabilityrdquo in SustainabilityIssues in Agricultural Development ed Ted J Davie and Isabelle A Shirmer (Wash-ington DC World Bank 1987) p 174

10 See Tom M L Wigley ldquoThe Science of Climate Changerdquo Pew Center on ClimateChange Report 2005

169

increases while sub-Saharan Africa and coastal areas in Asia are likelyto feel the strongest adverse effects Semi-arid and arid areas are par-ticularly vulnerable and will suffer a decrease in water availability in-creased likelihood of drought and growing heat stress In these sameareas groundwater resources are likely to decline so that moisture-re-lated plant stress will lower productivity Other areas will feel moremixed effects but overall the most likely outcomes are more variabilityin weather patterns including deeper and more prolonged droughtincreased temperatures and reduced productivity in rain-fed tropicaland sub-tropical agriculture reductions in access to fresh water andexpanding populations of pests and diseases

Climate change will affect agricultural productivity and peoplewill likely respond to it by adjusting their farming techniques and theirlivelihood strategies We are only now beginning to understand thedegree of adaptation but evidence shows that people in the most af-fected areas have already started to change the way they farm and gen-erate their livelihoods In the short-run farmers adapt by changing cropmixes using water conservation measures and adopting risk-manage-ment techniques to lessen the consequences of more frequent droughtsThey adjust their livelihood strategies to include more non-climate-affected sources of income For example they work off the farm andchange their migration strategies

Over the longer run and as the change in climate increases moreoptions are needed to create opportunities to adapt Governments mayinvest in and farmers may adopt technologies and production tech-niques that reduce the impact of climate change Agricultural researchsystems can respond by producing shorter-season seed varieties thatare more tolerant of drought rice varieties that are more tolerant ofsalinity and other germplasm that is resistant to environmental stressEnhanced means of managing soil moisture can be identified throughresearch Farmers may adopt conservation farming techniques thatminimize disruption of the soils and lower exposure to rainfall short-ages Conserving water is a particular concern because it is estimatedthat 70 percent of freshwater use is currently devoted to agriculture

It is important to recognize that if the projections of the scientificcommunity are correct the world is in a race against time Adaptationwill mitigate some of the ill effects of climate change and some areaswill likely prosper following adaptation But adaptation will not ame-liorate the ill effects of climate change in the most adversely affectedregions In low-lying coastal regions and some of the more arid areasthe imperative is to attain improvements in well being over the short-to medium-term Over the long haul climate change is likely to alter


170


the environment to such a degree that no adjustments in livelihood strat-egies will suffice

Chemical PollutionMisuse of chemical pesticides and fertilizers has contaminated the landand water in many developing countries damaging the health of pro-ducers and consumers stimulating the emergence of pests resistant topesticides destroying the natural enemies of pests and reducing fishpopulations or rendering them unsafe for human consumption Acutepesticide poisonings are common and little is known about potentiallong-term health effects Few developing countries have establishedeffective pesticide regulatory and enforcement systems

Hundreds of pests have become resistant to one or more chemi-cals and the number is growing Fertilizer runoff increases nitrate lev-els in ponds and canals reducing oxygen levels and killing fish Exces-sive pesticide levels often destroy fish in irrigated rice paddies

Heavy use of pesticides and fertilizers tends not to hurt agricul-tural production in the short-run However as resistance to pesticidesbuilds up and predators are reduced future production potentials arejeopardized And society bears the cost of off-farm pollution

CAUSES of ENVIRONMENTAL PROBLEMSEnvironmental degradation can result from physical economic andinstitutional factors Many environmental problems are interrelated forexample deforestation erosion and silting of rivers and reservoirs areall linked Natural resource degradation usually has direct and indirectcauses For example desertification can directly result from overgraz-ing and poor cropping practices but indirectly result from poverty andpopulation growth Physical or technical causes of natural resourcedegradation are often the most visible Land clearing for timber fuelwood cattle ranching or farming causes deforestation Deforestationresults in loss of biodiversity loss of soil and diminished soil fertilitysince soil uncovered in tropical forests loses its fertility quickly If theforest is burned carbon dioxide enters the atmosphere If the area issemi-arid loss of forests can contribute to desertification Desertifica-tion can also result from overgrazing which itself is caused by too manycattle eating grass in an area subject to dry spells or droughts Intensivecropping in semi-arid areas contributes to desertification Many otherexamples of physical causes of natural resource degradation can be citedSalinity and waterlogging result from poorly managed irrigation sys-tems Chemical pollution results from excessive fertilizer and pesticideuse Silting of rivers and tidal surges during storms cause flooding

171

The challenge in solving such problems however is in understand-ing what factors affect individual and group decisions about naturalresource use These factors are both economic and determined by insti-tutions Institutions include the legal system cultural norms marketstructures and other rules of behavior affecting decision-making in-centives Once we understand how economic and institutional factorsaffect decisions about resource use we can begin to formulate strate-gies to address the most serious environmental problems

Economic Causes of Natural Resource DegradationAn important economic cause of natural resource degradation occurswhen markets fail to reflect the true value of resources or the true costsof actions Market failures emerge due to the presence of externalitieshigh costs of information and in the provision of public goods An ex-ternality is created when decision-makers impose costs on others with-out considering these costs when making the decision Farmers for ex-ample may create off-farm costs associated with soil erosion or pesti-cide pollution without considering these external costs (see Box 9-1)Furthermore a lack of information about or concern for environmentaldamage creates costs that lead to environmentally destructive behav-ior For example the farmer may be unaware that his farming practicesare damaging long-term productivity or that cost-effective practices arereadily available to improve the situation In such cases the market isfailing to adequately transmit information to the farmer Environmen-tal quality is a public good which means it is very costly to prohibitsomeone from benefiting from it and one personrsquos benefiting from itdoes not preclude another from benefiting from it It is well known thatthe free market is associated with an undersupply of public goods Allthese forms of market failure contribute to natural resource problems

Poverty is another economic condition associated with environ-mental degradation Poverty drives people to farm marginal lands in-tensively to seek fuel wood and to follow other agricultural practicesthat produce food at the potential sacrifice of future production Asdiscussed in Chapter 4 poverty reinforces population growth which isa major contributor to deforestation overgrazing and farming on steepslopes drylands and flood plains

The concern of the poor for the present implying heavy discount-ing of future costs and benefits is matched by the needs of govern-ments in developing countries to deal with internal and external debtproblems Indeed the existence of debt problems in many countriesreflects previous decisions to spend on current consumption rather thansave for the future Governments follow policies that encourage natural


172


resource-based exports to pay off debts and import capital goods Theylack the financial resources to address environmental problems

Countries implementing economic development programs usu-ally find high rates of return to many types of capital investment Thehigh interest rates often characteristic of these cases encourage currentconsumption and may place demands on natural resources Interestrates in developing countries are also influenced by interest rates inmajor developed countries due to linkages through international fi-nancial markets

Institutional Causes of Natural Resource DegradationA major cause of environmental degradation is institutional failure bothprivate and public Existing social structures and local customs maynot be adequate to preserve the environment as economic developmentproceeds Or environmentally constructive social structures and cus-toms may be destroyed by national policies or by increases in the costsof transactions and of acting collectively In some cases inadequate in-stitutions are the legacy of colonial interference or the result of morerecent international influence

Market institutions determine how well markets work and as notedabove market failures are a chief cause of environmental degradationThese market failures mean that the market is not transmitting the truevalue of the resource to the decision maker Market failures can be dueto inadequately defined property rights costs associated with monitor-ing and enforcing property rights and weak enforcement institutionsIt may be unclear for example whether the farmer has the right to pol-lute the water or whether downstream users have the right to cleanwater Even if these rights are legally clear they may be difficult orimpossible to enforce Thus weak property rights contribute to themarket failure

Inadequate property rights in forest pastures and ground andsurface waters can undermine private or local collective incentives tomanage resources on a sustainable basis In some areas the land or wa-ter resource was traditionally held in common Under a common-property regime people in the village or community had access to usethe resources but did not own or rent them privately When the localsociety could maintain authority over the resource or when popula-tion pressures were such that the resource was in abundant supplythen this common property could be managed in a socially optimalmanner However as population increases and as national policies usurplocal authority breaking down traditions and customs incentives forresource preservation and traditional means of controlling access often

173

are destroyed If one person does not cut down the tree for fuel woodanother will Or if one personrsquos goat does not eat the blade of grassanother personrsquos goat will Or if one person does not use the water orcatch the fish another will The result is that incentives exist for eachindividual to overexploit resources because otherwise someone else will

Common-property regimes do not necessarily cause resource mis-management if local institutions create incentives to efficiently managethe resource In many areas of Africa common-property institutionswere said to cause overgrazing on rangelands However attempts bythe government to replace these institutions with private ownership

BOX 9-1

EXTERNALITIES and PRIVATE DECISIONSOne market failure associated with environmental degradation is the diver-

gence between private and social costs of actions This divergence is

caused by the presence of external costs An external cost exists when an

activity by one agent causes loss of welfare to another agent and the loss

is not considered by the author The effect of externalities on private deci-

sion-making is illustrated in the figure below

A farmer who cannot influence market prices will produce a good up

until the point where the private marginal cost of its production (MCp ) equals

the market price In the figure this point is shown where MCp = P

t and Q

p

units are produced An external cost is represented by the social marginal

cost curve (MCs) which exceeds the private cost curve From societyrsquos

point of view the desirable production level is Qs (where MC

s = P

t) Thus

the externality leads to more production of the good than is socially desir-

able


174


schemes were largely counterproductive contributing to more rapiddegradation of resources and leading to increased economic inequal-ity Efficient indigenous resource management institutions were re-placed by less effective but more modern institutions Common-property institutions can certainly be a viable means of managingresources11

In areas of frontier colonization poorly defined and inadequatelyenforced property rights can create incentives for over-exploitation ofnatural resources For example the Peten Region of northern Guate-mala is currently undergoing high rates of deforestation particularlyin its western extremities In the western Peten the Guatemalan gov-ernment established the Laguna de Tigre national park in 1990 It washoped that a national park would slow settlement and lead to conser-vation of the forest in its original state However the government doesnot have the resources to monitor and discourage settlement on theseisolated public lands and a weak legal system prevents enforcement oflaws prohibiting illegal settlement As a result illegal settlers are defor-esting the lands while population pressures are growing water is in-creasingly scarce and ecological integrity has been destroyed

Public policies are another major institutional cause of natural re-source degradation Agricultural pricing policies input subsidies andland use policies often discourage sustainable resource use Govern-ments in developing countries intervene in agricultural markets to keepfood prices artificially low These interventions cause land to be under-valued reducing incentives for conservation And low incomes makethe investment required for sustainable output difficult On the otherhand higher agricultural prices raise the value of land and as a resultcan contribute to increased deforestation12 These competing impactsof agricultural prices on the environment make it important that policyimpacts be explored as a part of government decision-making

Governments frequently subsidize fertilizer and pesticides in partto compensate for keeping farm product prices low If fertilizer or pes-ticide use causes an externality then subsidies because they increaseinput use will increase the level of the externality Subsidies may beindirect in the form of roads or export subsidies that encourage defor-estation Road access is strongly associated with deforestation in all

11 See Daniel W Bromley ed Making the Commons Work (San Francisco Institute forContemporary Studies Press 1992)

12 See Arild Angelsen and David Kaimowitz ldquoRethinking the Causes of DeforestationLessons from Economic Modelsrdquo The Woirld Bank Research Observer vol 14 no 1(February 1999) pp 73ndash98

175

regions of the world Subsidized irrigation water can encourage itswasteful use

Land tenure and land use policies may cause exploitation of agri-cultural and forest lands with little regard for future productivity ef-fects Short leases for example create incentives to mine the resourcebase for all it is worth in the short-run And as just noted it is an errorto think that local incentive problems can be entirely corrected by na-tional policies Bromley and Chapagain point out that in Nepal na-tional policies on forests have destroyed local conservation practicesand incentives13 A common policy in Latin America has been to re-quire that in colonized areas land needs to be developed which usu-ally means cleared of trees prior to receiving title to the land A largepart of the deforestation in the Brazilian Amazon is associated withthese types of titling rules

Land use patterns are sometimes affected by colonial heritage orother international influences In parts of Latin America and the Carib-bean large sugarcane coffee and banana plantations or even cattleranches are found in the fertile valleys and plains while small peasantfarms intensively producing food crops dot the eroding hillsides Thelow labor intensity of production in the valleys depresses job opportu-nities and forces the poor to rely on fragile lands to earn incomes Thesepatterns are the legacy of colonialism Colonial powers in Africa changedcropping system to cash cropping in areas where cash cropping couldnot be supported by the natural resource base Peasants have been forcedonto marginal lands reducing lands for nomads Traditional nomadictrading patterns were also disrupted

These and other institutional policies have contributed to naturalresource problems as they exist today Institutional change is thereforeone of the potential solutions to these problems as described below

POTENTIAL SOLUTIONS to NATURAL RESOURCE

PROBLEMSSolutions to environmental problems contain technical economic andinstitutional dimensions Technical solutions are needed to provide thephysical means of remedying natural resource degradation while eco-nomic and institutional solutions provide the incentives for behavioralchange

13 See Daniel W Bromley and Devendra P Chapagain ldquoThe Village Against the Cen-ter Resource Depletion in South Asiardquo American Journal of Agricultural Economicsvol 68 (December 1984) pp 868ndash73


176


Technical Solutions to Natural Resource ProblemsA variety of technical solutions are available to solve deforestation ero-sion desertification flooding salinity chemical pollution and otherenvironmental problems Where technical solutions are lacking gov-ernment-sponsored research and education can develop new naturalresource-conserving practices and facilitate their adoption

Windbreaks contour plowing mulching legume fallow cropsalley cropping deferred grazing rotational grazing well-distributedwatering places and re-vegetation or reforestation are all examples ofphysical practices that could help reduce soil erosion silting and de-sertification Solar pumps biogas generators and more efficient cook-ing stoves can provide or save energy thereby reducing fuel-wood con-sumption deforestation and desertification Embankments can provideprotection from flooding for limited areas and dams can be built onrivers to control water flows

Irrigation canals can be better lined to reduce waterlogging andsalinity and conserve water resources Integrated pest management tech-niques can be developed that involve increased biological and culturalcontrol of pests to reduce pesticide pollution Germplasm banks can beused and conservation reserves established to preserve endangered plantspecies

These are just a few of the potential technical or physical solutionsto environmental problems In many cases these technical solutions arealready known but in others additional research is essential for suc-cess In the pest management area for example much work still needsto be completed on biological controls for major pests in developingcountries Integrated pest management (IPM) is a family of pest man-agement techniques that lowers dependence on toxic pesticides in manycountries these techniques are technically feasible but have not beenwidely spread to farmers due to limited extension and agricultural out-reach services in many developing countries14

The availability of technical solutions to natural resource prob-lems is essential for reducing environmental degradation In almost allcases however these solutions must he combined with economic andinstitutional changes that create incentives for behavioral change With-out these incentives it is unlikely that the technologies will be widelyadopted since they usually imply increased costs to their users

14 See George W Norton E A Heinrichs Gregory C Luther and Michael E Irwineds Globalizing Integrated Pest Management A Participatory Research Process (AmesIowa Blackwell Publishing 2004)

177

A brush fence in Kenya being used to facilitate rotational grazing

Economic and Institutional Solutions to Natural Resource

DegradationInternational and natural agricultural research systems can generatenew technologies that increase food production and incomes As in-comes grow population pressures are reduced and the demand forenvironmental protection increases New institutions may be formed(or existing institutions may evolve) in response to this demand andincentives for resource conservation are created

As countries develop the major source of growth is not the natu-ral resource base but new knowledge (see Chapter 5) This knowledgecan to some extent substitute for natural resources and is less subjectto the diminishing returns associated with more intensive use of natu-ral resources Increases in agricultural productivity resulting from thenew knowledge or technologies not only raise incomes but also thevalue of human time As the value of human time increases popula-tion growth rates decline with favorable implications for natural re-source problems

The best immediate way to solve natural resource problems ishowever through reforms of economic policy or institutional changesthat reduce market failures Reducing the discrimination against agri-culture in pricing policies should help Low returns to agriculture de-press farmland prices and the returns to investments in land conser-vancy practices as noted earlier Low returns reduce the demand for


178


Spraying pesticides

in the Philippines

labor and therefore labor income If returns to agriculture were raisedsubsidies on inputs such as agro-chemicals could be eliminated How-ever increased returns to agriculture also put additional pressure onforest resources so institutional mechanisms to reduce deforestationmust accompany changes in agricultural pricing policies

Several means are available for addressing the underlying marketfailures associated with environmental degradations Subsidies andtaxes can be used as lsquolsquocarrotsrsquorsquo or lsquolsquosticksrsquorsquo to reduce externalities or off-site effects associated with agricultural and forestry use An example ofa conservation subsidy (ie a ldquocarrotrsquorsquo) might be a program in whichthe government shares the cost of building terraces windshybreaks andfences or of planting trees In some cases local workers can be paid in-kind with food from internationally supplied food aid An example ofa ldquostickrsquorsquo is a sales tax on chemical pesticides Such subsidies are de-signed to ldquointernalizerdquo the externality so that the economic actor con-siders the social costs associated with his or her decisions

Institutional change that creates secure property rights will helpaddress some problems of environmental degradation Ownership ofland titles increases the returns to long-term investments in land On

179

BOX 9-2

INSTITUTIONS and DEFORESTATION

in the BRAZILIAN AMAZONBrazil contains 35 million square kilometers of tropical forests some 30

percent of the worldrsquos total Most of the forests are found in the Brazilian

Amazon Basin Deforestation of this rich reserve of plant and animal spe-

cies has increased in recent years raising concerns for its effects on at-

mospheric carbon levels and on the maintenance of global biodiversity

The Brazilian government made a conscious decision in the 1960s to

develop the Amazon as a means of relieving population pressures provid-

ing territorial security and exploiting the regionrsquos wealth Ambitious road-

building programs other infrastructure development agricultural coloniza-

tion projects and policies providing tax and other incentives for agricultural

and industrial development were begun These projects had the effect of

opening access to the Amazon and promoting environmentally unsound

development

Tax exemptions and cheap credit spurred the creation of large-scale

livestock projects whose economic and environmental suitability to the

region was questionable The National Integration Program established a

network of villages towns and cities and cleared lots for in-migrating set-

tlers The plans for these settlements were made without regard for soil

fertility or agricultural potential and the cleared forest lands were quickly

eroded and otherwise degraded

Environmentally destructive settlement practices are promoted through-

out the Amazon by the Brazilian governmentrsquos practice of awarding land

titles only for deforested lands A migrant in either an official settlement

project or an invaded area can obtain title to the land simply by clearing the

forest Once the title is granted the migrant can sell or transfer it to some-

one else and proceed to clear additional lands Calculations show that it is

more profitable to clear land plant subsistence crops for two years and

then sell and move than it is to remain as a permanent settler

Clearly the rate of deforestation in Amazonia is directly influenced by

government policies and other institutional arrangements It is just as clear

that policy reform and institutional adjustments can slow or even reverse

this process

Source Dennis J Mahar ldquoDeforestation in Brazilrsquos Amazon Region Magnitude

Rate and Causesrdquo chapter 7 in Gunter Schramm and Jeremy J Warford eds

Environmental Management and Economic Development (Baltimore Johns

Hopkins University Press 1989)


180


the other hand the removal of institutions that guarantee land titlesonly if forests are cleared will help stop deforestation (see Box 9-2) Theprovision of property rights does not necessarily imply privatizationThere are numerous examples of common-property regimes managedin environmentally sound fashions and it is only when populationgrowth or other changes put pressure on group management that theeffectiveness of the management is diminished Institutional changesthat reinforce these common-property management schemes may bemore effective than privatization

Many successful examples can be found of assigning propertyrights and creating markets for environmental quality In eastern PetenGuatemala community organizations were granted contracts for sus-tainable use of forest resources These organizations because they havethe rights to the natural resources control access to the forest and ldquopo-licerdquo extractive activities such as timber harvest by outsiders As a re-sult the eastern Peten is still heavily forested especially in comparisonto the west where inadequate property rights and high enforcementcosts have contributed to heavy deforestation (see above) In Zimba-bwe local villagers were given rights to harvest elephants and sell theserights to foreign hunters The money from these sales is kept and usedfor development purposes in the villages The villagers now see theelephants as a valuable resource and protect them from poachers As aresult elephant populations are growing rapidly in areas where 15 yearsago the elephant was practically extinct

Certification is a process whereby international markets recognizeand reward products that are sustainably produced For example woodin the eastern Peten is harvested in an environmentally sustainablemanner and is certified as ldquogreenrdquo by Smartwood an international or-ganization The wood is favorably received in international marketsand receives a price premium Other products such as coffee cocoaand bananas can also be certified as being produced in an environmen-tally and socially sustainable manner

Certification is just one element of an emerging family of mecha-nisms to create markets for environmental goods Payments for envi-ronmental services (PES) are schemes whereby demanders of environ-mental goods are brought together with suppliers so that both benefitA global example is the Clean Development Mechanism (CDM) estab-lished by an international environmental agreement called the KyotoProtocol which allows countries that are committed to greenhouse gasemission reductions to pay for carbon emmission-reducing projects suchas reforestation in developing countries as an alternative to more ex-pensive emission reductions in their own country Local examples of

181

PES schemes are found throughout Central America where water-using towns and cities pay upstream farmers to adopt practices thatcreate less damage to water quality These schemes create a market forthe environmental good and induce producers to consider the value ofthe resource when making decisions

Regulation is an alternative institutional mechanism for influenc-ing environmental behavior Although difficult to enforce regulationcan play a role when combined with other economic incentives Forexample burning of crop stubble farming of particularly erosive landsor logging in certain areas can be prohibited in conjunction with a pro-gram that also provides other government economic benefits to farm-ers or forest owners Families can be restricted from settling in flood-prone areas perhaps with the provision of funds for resettlement Ex-perience shows that without incentives for changing behavior regula-tions tend to be ineffective since enforcement is costly and there areprivate incentives to cheat

Physical restrictions on grazing land reform programs that dis-tribute land to small farmers revised leasing arrangements and manyother government-sponsored institutional changes can improve natu-ral resource sustainability if certain principles are followed First thereis a need for careful assessment of the economic benefits and costs in-cluding externalities resulting from the policies Second local input isneeded in the decision-making process Third compensation often isrequired for any losers That society as a whole will be better off follow-ing these institutional changes is not enough Losers may need to becompensated or they may oppose any change PES schemes can be ex-ploited in such instances and those who benefit from the change canldquobriberdquo producers to adopt it

These three principles hold for institutional changes at various lev-els mdash local regional national and international mdash and they are notalways easy to apply If developed countries want developing coun-tries to reduce carbon-dioxide emissions associated with forest burn-ing developed countries must be willing to foot part of the bill TheKyoto Protocol for climate change adopted in 1997 reflected this needfor mutual sacrifice to limit greenhouse gas emissions It was the prod-uct of several years of intense negotiations and reflected developing-country energy needs for economic development The agreement al-though not ratified by the US government entered into force in early2005 and sparked creation of markets for trading emission allowancesunder the CDM New markets for formerly unvalued environmental goods(such as carbon sequestration) represent opportunities for producers indeveloping countries The challenge is to overcome institutional


182


barriers and information and administrative costs at the local level PESschemes require careful monitoring to ensure that the land users areadhering to the agreements and a well-functioning legal system to ad-judicate claims

Similarly governments need to consider what factors affect indi-vidual decisions Solutions to environmental problems do not justemerge from changes in the legal environment If governments wantdeforestation reduced they cannot just pass a national decree Theymust involve local decision makers in designing an institutional solu-tion that provides individual incentives for appropriate behavior Some-one may need to estimate the costs and benefits associated with alter-native institutional mechanisms Enforcement mechanisms need to befair and have teeth

In many cases the presence of transactions costs and collectiveaction has created institutional environments that are destructive to thenatural resource base Imperfect information corrupt government offi-cials and the absence of new institutional arrangements to replace pre-vious social and cultural norms that constrained behavior harmful tothe groups are serious problems Improvements in information flowsand creation of markets to reflect environmental values are essential ifsuch corrupt behavior and reductions in other transactions costs are tobe reduced Education also becomes vitally important Thus focusingon communications infrastructure and human-capital development aretwo keys to environmental improvement

SUMMARYSound environmental management is essential for sustained agricul-tural and economic development Yet environmental degradation isevident throughout the developing world Soil erosion silting of riversand reservoirs flooding overgrazing poor cropping practices deserti-fication salinity and waterlogging deforestation energy depletion lossof biodiversity and chemical pollution have become major problemsPoverty high rates of return to capital debt problems rapid popula-tion growth and misguided public policies conspire against solutionsEnvironmental problems are interrelated and understanding theircauses requires sorting out complex physical economic and institu-tional linkages Technical solutions are needed for each of these prob-lems but economic and institutional changes must provide the incen-tives for behavioral change As incomes grow population pressuresare reduced and the demand for environmental protection increasesEconomic development means more resources in the long run for address-ing environmental problems Changes in taxes subsidies regulations

183

and other policies can influence local incentives for conservation Bal-ancing benefits with costs obtaining local input in the decision-making process and compensating losers are needed for effective solu-tions to local and global environmental problems Because transactionscosts must be reduced for natural resource conservation to occur infor-mation flows must be improved and human capital must be developed

IMPORTANT TERMS and CONCEPTSBiodiversity Greenhouse effectChemical pollution Institutional changeClimate change Market FailureCommon property Natural resource managementDeforestation OvergrazingDesertification Payments for Environmental ServicesDiscounting of costs and benefits RegulationsGlobal warming Salinity and waterloggingEnvironmental degradation Soil erosionExternalities Subsidies and taxesFlooding Sustainable resource use

Looking AheadIn this chapter we examined the nature and causes of environmentalproblems in developing countries Potential technical economic andinstitutional solutions were considered so that agricultural develop-ment can be sustainable In the next major section of the book we con-sider what it takes to improve agriculture more generally from both atechnical and an institutional perspective to contribute to sustainabledevelopment However first in Chapter 10 we consider the how hu-man resources including family structure and gender issues influencestandards of living in developing countries

OUESTIONS for DISCUSSION1 What are the major natural resource problems facing developing

countries2 Are the poorest countries the most vulnerable to environmental

degradation Why or why not3 How are flooding and soil erosion related4 What is desertification5 How are waterlogging and salinity problems interrelated6 How are deforestation and energy problems interrelated7 What are the major technical or physical causes of natural resource

degradation


184

8 What common market failures lead to environmental degradationin developing countries

9 What is a public good Why might the free market undersupply apublic good

10 How is climate change related to market failure What efforts toaddress the market failure might have major impacts on carbon emis-sions

11 What are some of the technological solutions to natural resourceproblems

12 What are some of the economic and institutional solutions to natu-ral resource problems

13 How does a PES scheme help correct for market failure14 What are three key principles that must hold if institutional changes

are to successfully solve environmental problems15 Why are reductions in transactions costs important for sustainable

natural resource use

RECOMMENDED READINGSMarkandaya Anil Patrice Harou Lorenzo Giovanni Bellu and Vito

Cistulli Environmental Economics for Sustainable Growth (NorthhamptonMass Edward Elgar 2002)

Pearce David W and R Kerry Turner Economics of Natural Resources andthe Environment (Baltimore Johns Hopkins University Press 1990) pp61ndash9 342ndash60

Schramm Gunter and Jeremy J Warford eds Environmental Managementand Economic Development (Baltimore Johns Hopkins University Press1989)

Tietenberg T H ldquoThe Poverty Connection to Environmental PolicyrdquoChallenge September-October 1990 pp 26ndash32

Tietenberg T H and H Folmer eds The International Yearbook of Envi-ronmental and Resource Economics 20042005 (Cheltenham UK EdwardElgar 2004)

World Commission on Environment and Development Our Common Fu-ture (New York Oxford University Press 1987)


185

CHAPTER 10

Human Resources Family

Structure and Gender Roles

ldquoWomen account for 70 to 80 percent of household food production

in Sub-Saharan Africa 65 percent in Asia and 45 percent in Latin

America and the Caribbean They achieve this (production) despite

unequal access to land to inputs such as improved seeds and fer-

tilizer and to informationrdquo Lynn R Brown et al 20011

THIS CHAPTER1 Discusses the role of human resources in agricultural and economic

development2 Examines differences in family structure and gender roles in farm

households in developing countries3 Considers determinants of gender roles in farm households

Poor agricultural households in developing countries generallyhave few assets Some own small parcels of land but all householdshave human assets The productivity of human assets helps determineprospects for accumulation of other assets and increased income overtime Productivity of labor can be improved through investments ineducation health care nutrition and acquisition of skills Decisionsabout investments in education how household labor is deployed andabout the size and structure of families are made by families Thesedecisions depend on policy-based and other incentive structures cul-tural norms and gender roles such decisions have major impacts on

1 Lynn R Brown Hilary Feldstein Lawrence Haddad Christina Pentildea and AgnesQuisumbing Chapter 32 p 205 in Per Pinstrup-Andersen and Rajul Pandya-Lorcheds The Unfinished Agenda Perspectives on Overcoming Hunger Poverty and Envi-ronmental Degradation (International Food Policy Research Institute WashingtonDC 2001)

186


productivity asset accumulation and household well-being In somesocieties for example girls are less likely to attend school than are boysin others women are less likely to receive health care and have shorterlife expectancies than do men We examine the role and determinantsof investments in education how human resources affect householdwell-being and the roles of men women and children in making deci-sions and participating in household activities

ROLE of EDUCATIONThe overall productivity of the economy depends on the quantity andquality of inputs into production Better education health care andacquisition of skills are clear means of improving labor productivityEvidence continually shows that better-educated individuals earn higherincomes and that these higher incomes reflect greater productivity2

Education can be an important contributor to improved agriculturalproductivity underutilization and low productivity of human resourcesin agriculture is a serious problem in many developing countries Bet-ter-educated farmers are more able to adopt new technologies are bet-ter able to understand price and market information and have moreaccess to credit and other forms of capital Better-educated care giverscan prepare more nutritional meals reduce diseases through improve-ments in basic sanitary practices and assist their children in learning ata younger age Countries that fail to improve the skills and knowledgeof farmers and their families find it difficult to develop anything else

Objectives and Benefits of EducationRural education is an investment in people that has as its objectives (1)improving agricultural productivity and efficiency (2) preparing chil-dren for non-farm occupations if they have to leave farming and (3)enhancing the general quality of life by enabling better decision mak-ing Education may help motivate farmers toward change teach im-proved decision-making and farm-management methods provide farm-ers with technical and practical information and lead to better market-ing of higher-valued farm outputs Agricultural extension is comple-mentary to other sources of information because it speeds the transferof knowledge about new technologies and other research results (seeChapter 12 for more details on extension systems)

2 Paul Glewwe ldquoSchools and Skills in Developing Countries Education Policies andSocioeconomic Outcomesrdquo Journal of Economic Literature vol 40 (2) June 2002 pp436ndash82

187

A country with a literate people in rural areas will have better in-formation flows than one without due simply to better communica-tions Communications help reduce the transactions costs that hold backdevelopment they provide information to improve the timing of pro-ductive activities and lower risk Education helps farmers acquire un-derstand and sort out technical institutional and market information

The result is that investments in education yield returns not justfor the farmer but for society as a whole mdash educational attainment is apublic good As education levels increase in a village all villagers tendto gain from more productive neighbors better information flows andmore experimentation and innovation Because it results in a more pro-ductive and efficient agriculture and in a more productive labor forcefor non-farm employment and because of its public good characteris-tics most countries finance education particularly at the primary andsecondary levels TW Schultz has argued that education helps peopleto deal with economic disequilibria Thus as agriculture in a countryshifts from a traditional to a more dynamic science-based mode thevalue of education increases

Education is important not just for farmers and for children whowill continue farming but for those who leave agriculture Educationfor non-farm jobs is particularly important for agricultural develop-ment if the youth acquire jobs as agricultural extension agents manag-ers of cooperatives and other business firms supplying inputs to farm-ers or marketing their products agricultural scientists or governmentofficials who administer agricultural programs Educated children whodo not choose agricultural occupations often send remittances backhome these remittances are an important source of investment capitalfor farmers It is important to understand that education represents aninvestment in human beings and that these investments reap returnsboth inside and outside agriculture If a child of a farmer becomes edu-cated and decides to leave agriculture and migrate to a city for a jobthe individual and society as a whole both gain from the investment

Education of girls can be particularly important for developmentAs women become more educated they live longer and healthier livesthe value of their time increases the health and nutrition of family mem-bers improves and total fertility declines3 They have fewer healthierand better-educated children They also earn more in farming and off

3 See T Paul Schultz ldquoWomenrsquos Role in the Agricultural Householdrdquo Chapter 8 inBruce L Gardner and Gordon C Rausser eds Handbook of Agricultural Economics(New York Elsevier 2001)

CHAPTER 10 mdash HUMAN RESOURCES FAMILY STRUCTURE AND GENDER ROLES

188


the farm4 Payoffs to womenrsquos education are found in the short-runthrough improved productivity and long-run payoffs include reduc-tions in intergenerational poverty Although progress has been madein improving girlsrsquo access to schooling gaps remain particularly in thepoorest countries where girls are only 80 percent as likely as boys toattend school

Major Types of EducationThree basic types of education exist (1) primary and secondary educa-tion (2) higher education and (3) adult education Most countries havea goal of almost universal primary education and eventually second-ary education as well Primary education provides basic literary andcomputational skills Secondary education provides training for stu-dents going on to higher education and technical education for thosewho seek immediate employment

The need for higher education related to agriculture depends inpart on the growth of employment opportunities in agricultural researchextension agribusiness and government Undergraduate agriculturalprograms have expanded in many African Asian and Latin Americancountries in recent years Some of these colleges such as the Pan-American Agricultural School in Zamorano Honduras require a mixof academic and practical training and draw students from several coun-tries

Postgraduate programs also have expanded in several larger de-veloping countries such as India the Philippines Brazil and MexicoThe quality of these programs is variable but the programs have a bet-ter track record of their students returning home after completing theirdegrees than do graduate programs in developed countries Foreignacademic training in developed countries also has the disadvantage thatthe training and research may be less relevant to the home country ofthe student

In adult education often called extension education in agriculturefarmers are the primary clientele and the programs are mostly orientedtoward production problems facing farmers Extension accelerates thedissemination of research results to farmers and in some cases helpstransmit farmersrsquo problems back to researchers Extension workers pro-vide training for farmers on a variety of subjects and must have techni-cal competence economic competence farming competence and com-munication skills Thus extension workers require extensive training

4 See World Bank Engendering Development (New York Oxford University Press 2001)

189

and retraining to maintain their credibility with farmers As informa-tion requirements for farming increase adult literacy is gaining impor-tance for understanding agricultural innovations Technology andextension information are increasingly being transmitted through elec-tronic means so basic computer literacy is also important Basic adultliteracy and the ability to absorb new messages about productivity-improving technologies are highly complementary so that over timeadult education in rural areas needs to be broadened to include basicskills

Issues in Education in Developing CountriesBecause education is critical for a countryrsquos development prospectsseveral inter-related issues must be addressed by education policymakers These issues include finance questions such as measures torecover costs in K-12 education use of resources to retain studentsthrough higher grade levels versus expanding basic coverage to alldecisions about educational curricula such as providing technical ver-sus more general education and gender and economic barriers to par-ticipation in basic education Cost recovery measures such as schoolfees were introduced in many developing countries as part of struc-tural adjustment programs in the 1980s They are based on the idea thatsince some of the benefits of education are private and are captured bythe individual the beneficiary (the student or his or her family) shouldbear some of the costs They also broaden the financial base of supportfor the educational system and provide resources to cash-poor localeducational districts However increasing evidence shows that suchfees represent major barriers to participation in education especially tothe poorest and countries that have abolished fees have seen remark-able growth in school participation The World Bank which was a strongproponent of cost-recovery in basic education now has a blanket policyopposing such fees Elimination of fees will help reduce gender andeconomic barriers to participation in education

Developing countries face choices about the design of their educa-tional curricula in rural areas While most schools provide basicliteracy and mathematics choices need to be made about technical con-tent The experience has been mixed relative to agricultural educationat the K-12 level in developing countries While some argue that suchschools need to provide useful skills and thus should focus on trainingin agriculture evidence shows that design of an agricultural curricu-lum is difficult and costly Often training methods do not correspondto conditions faced by poor farmers and time spent in such trainingreduces time available for other subjects When rural schools focus too


190


Female education is as important as male education

yet it is often neglected

closely on rural-specific skills graduates face disadvantages when seek-ing higher education or finding work in urban areas

FAMILY STRUCTURE and GENDER ROLESFamily structures vary around the world and that variation impliesdifferences in specific roles played by individual family members inhousehold affairs in agricultural production and marketing and in in-come generation in and out of agriculture For example in many WestAfrican countries families live in compound households that includemore than one generation and individual family members are assignedspecific parcels of land to farm In much of Latin America the basichousehold is a nuclear family with parents and children and familymembers have specific responsibilities within the household and infarming In many parts of Asia nuclear families predominate and insome cases family members work side by side in fields but in othersmales and females undertake different tasks Regardless of the regionwomen have key roles to play in farming systems Women are involvednot only in household chores and child rearing but are a major sourceof labor for food production and account for a large proportion of eco-nomic activity

191

Gender RolesThe term ldquogenderrdquo refers to non-biological differences between womenand men and roles in farming and household decisions in developingcountries differ by gender With the notable exception of strongly Is-lamic societies women play two major roles in the rural areas of mostdeveloping countries First they have household responsibilities forchild rearing food preparation collecting water and firewood and otherchores Second they are paid or unpaid workers in agriculture or offthe farm They produce process preserve and prepare food They workin the fields they tend livestock they thresh grain and they carry pro-duce to market In many areas women manage the affairs of the house-hold and the farm They sell their labor to other farms and sometimesmigrate to plantations Involvement in farm production may be sea-sonal particularly in Asia where in many countries women assumemajor responsibilities for weeding and harvesting both on their ownfarms and as paid labor on other farms Women also work in smallindustries and in the informal sector producing goods and services forsales locally or beyond

Women are important to agriculture in most areas of the worldbut they play the largest role in farming in Africa In many countriesnearly all the tasks connected with food production are left to womenMen may tend livestock or produce cash crops but food crops are gen-erally the purview of women In Malawi for example over two-thirds

Women threshing wheat in Nepal


192


of those working full time in farming are women5 In some areas ofAfrica where men migrate to work elsewhere the entire administrationof the household is left to women (Box 10-1) Similar cases exist in theCentral American highlands where men migrate seasonally to partici-pate in coffee harvests and to coastal plantations Households headedby women make up 20 to 25 percent of rural households in developingcountries excluding China and Islamic societies6 In Latin Americawomen care for animals particularly chickens and pigs while tendinggarden vegetables and other food crops In sugar- and fruit-producingareas especially in the Caribbean women work as cash laborers onplantations and provide a substantial proportion of household incomeIn Asia many examples of female farming systems are found In Nepal itis estimated that women on subsistence farms produce 50 percent ofhousehold income men and children produce 44 and 6 percent respec-tively7

Even though they tend to work much longer days than men thetrue extent of involvement of women in agriculturally related activitiesis often underestimated and misunderstood by policy makers Whensurveys are taken men frequently respond as heads of households andboth men and women usually describe the womanrsquos principal occupa-tion as housewife In many areas women do not view themselves asldquofarmersrdquo even when they work long hours on the farm and have largeinfluences over farming-related decisions8 (see Box 10-2) They are thencounted in the survey as economically inactive This ldquoinvisibilityrdquo offemale employment has led to policies and programs that ignore womenand sometimes adversely affect them

One impact of the ldquoinvisibilityrdquo of women has been to lower theirstatus Within the household this lower status may mean less power tomake decisions less food fewer heath-related investments in womenand a heavier work and disease burden In times of household crisiswomen and female children may bear a heavier burden in southern

5 Janice Juggins ldquoGender-Related Impacts and the Work of the International Agricul-tural Research centersrdquo Consultative Group for International Agricultural Research(CGIAR) Study Paper Number 17 World Bank Washington DC 1986

6 Juggins ldquoGender-Related Impacts helliprdquo7 Meena Acharya and Lynn Bennett ldquoWomen and the Subsistence Sector Economic

Participation and Household Decision Making in Nepalrdquo World Bank Staff Work-ing Paper Number 526 Washington DC World Bank 1982

8 Sarah Hamilton Keith Moore Colette Harris Mark Erbaugh Irene Tanzo CarolynSachs and Linda Asturias de Barros ldquoGender and IPMrdquo Chapter 14 in GlobalizingIntegrated Pest Management A Participatory Research Process edited by George WNorton EA Heinrichs Gregory C Luther and Michael E Irwin (Ames IowaBlackwell Publishing Co 2005)

193

BOX 10-1

GENDER DIVISION of LABOR in BOTSWANAA study of traditional farms in Central Botswana uncovered illuminating

differences in the division of labor by gender Because men have opportu-

nities to work in mines a large proportion of rural households are headed

by females (40 percent in this study) In agricultural areas land is held

communally by the village and both men and women can obtain rights to

cultivate the land Mostly sorghum but also maize cowpeas and melon

varieties are grown on 4 to 5 hectare plots Livestock particularly cattle

are very important

In all aspects of economic activity there is a stark differentiation be-

tween male and female roles In crop production men traditionally plow

and maintain the fields women sow the seeds weed harvest and thresh

Men and boys almost exclusively tend and milk livestock (mostly cattle and

goats) while women manage the chickens used mostly for home con-

sumption Women brew and sell sorghum beer and beer sales can pro-

duce substantial amounts of household income

Women provide virtually all the labor for household maintenance Time

spent gathering firewood fetching water cooking and in other household

chores accounts for 68 percent of the womenrsquos total time Men allocate

only 10 percent of their total time to household chores Even so women

provide 38 percent more time for agricultural fieldwork than do men Women

provide 48 percent of the total hours worked by members of the house-

hold men account for 22 percent and the children the rest

Source Doyle C Baker with Hilary Sims Feldstein ldquoBotswana Farming Sys-

tems Research in a Drought Prone Environment Central Region Farming Sys-

tems Research Projectrdquo chapter 3 in Hilary Simms Feldstein and Susan V

Poats eds Working Together Gender Analysis in Agriculture Vol I Case Stud-

ies (Westford Conn Kumarian Press 1989) pp 43ndash7


Ethiopia for example research shows that women suffer more fromshocks to income and health9 Lower status of females has been associ-ated with weaker control over household resources less access toinformation and public services such as education and health discrimi-nation in employment and unequal rights to land and other importantassets10 Women are less likely to be members of producer and marketing

9 Stephan Dercon and Pramila Krishnan ldquoIn Sickness and in Health Risk Sharingwithin Households in Rural Ethiopiardquo Journal of Political Economy vol 108 no 4(August 2000) pp 688ndash727

10 Lisa C Smith Usha Ramakrishnan Aida Ndiaye Lawrence Haddad and ReynaldoMartorell The Importance of Womenrsquos Status for Child Nutrition in Developing Coun-tries International Food Policy Research Report number 131 Washington DCIFPRI 2003

194


BOX 10-2

GENDER and INTEGRATED PEST MANAGEMENTA recent study by Hamilton and others examines how gender roles in dif-

ferent regions of the world affect the use of pest management practices in

agriculture Studies show that improper use of pesticides can lower house-

hold incomes and have negative health consequences for household mem-

bers Women have a special interest in pesticide use as they frequently

shoulder responsibility for the health of the family particularly children

Evidence shows that women have to overcome unique barriers if they or

their families are to adopt integrated pest management (IPM) practices

which are usually associated with less use of pesticides Lack of recogni-

tion means that women are often excluded from information about IPM

practices they have less access to extension services are less likely to

participate in training and are less frequently members of producer orga-

nizations which transmit information to their members Women also have

less access to labor either due to excessive time demands on their own or

limited access to hired labor markets IPM practices tend to be labor inten-

sive Women have less access to land and because of uncertainty associ-

ated with IPM most adopters of IPM have larger holdings they adopt IPM

on part of their lands and use conventional techniques on others

Despite these constraints the experience from West Africa Philip-

pines and Central and South America found involvement of women to be

a key determinant of whether households use IPM or not Womenrsquos par-

ticipation in field-level trials in identifying constraints so that research could

address them and in training programs helped spread IPM adoption in all

the countries studied Women are especially receptive to IPM messages

because they play a major role in managing household finances and easily

recognize the health consequences of mishandled pesticides

Source Sarah Hamilton Keith Moore Colette Harris Mark Erbaugh Irene Tanzo

Carolyn Sachs and Linda Asturias de Barros ldquoGender and IPMrdquo Chapter 14 in

Globalizing Integrated Pest Management A Participatory Research Process

edited by George W Norton EA Heinrichs Gregory C Luther and Michael E

Irwin (Ames Iowa Blackwell Publishing Co 2005)

195


11 Juggins ldquoGender-Related Impacts helliprdquo

organizations and are less likely to have title to land (and thus accessto many forms of credit) These factors affect womenrsquos own nutritionaland health status and that of their children

DETERMINANTS of GENDER ROLES in AGRICULTURESocial cultural and religious factors population pressures farmingtechniques off-farm job opportunities colonial history income levelsdisease and health conditions and many other factors determine therole of women in farming systems Sometimes in areas with apparentlysimilar physical conditions women assume very different roles As off-farm job opportunities population pressures income levels and farm-ing techniques change so too does the role of women (see Box 10-3)

Shifting cultivation with hand labor lends itself more to femalelabor than does settled cultivation with a plow For countries with lowpopulation densities adequate food could be raised without using malelabor in farming Men used to spend their time felling trees huntingand in warfare In most areas agriculture has changed from shiftingcultivation to settled agriculture and cash crops This change has re-sulted in a greater role for men but often the role of women in farmwork still dominates

The shift to the plow and draft animals has made a difference inthe amount of male labor used in some areas and long-standing differ-ences in farming techniques undoubtedly account for many of the re-gional gender differences in farming activities In regions of intensivecultivation on small irrigated farms for example in several Asian coun-tries men women and children must work hard to generate enoughproduction on a small piece of land Work is mostly done by hand Incontrast on larger farms more tasks may be mechanized and womenmay devote a higher percentage of their time to housework In somecases mechanization has displaced female labor and lowered their sta-tus as a result since housework is often under-appreciated In othercases especially sub-Saharan Africa mechanization has increased theamount of land that can be cultivated by men and put additional strainon women who are responsible for planting and weeding

Integration of small-scale farmers into the labor market has in-creased the importance of womenrsquos role in agriculture because it isoften the males who find outside wage work In some countries malesmay work away from the household for several weeks or months at atime In Lesotho for example the result has been that 70 percent of thehouseholds are headed by women11 Diseases such as HIV-AIDS have

196

BOX 10-3

TANZANIA CONSERVATION AGRICULTURE

for SUSTAINABLE DEVELOPMENTThe Conservation Agriculture for Sustainable Agriculture and Rural Devel-

opment project which began in 2004 promotes conservation agriculture

(CA) for small-scale and resource-poor especially women farmers In the

project energy-efficient agricultural production technologies combined with

participatory methodologies enable farmers to adopt practices that reduce

labor and raise yields and incomes Women are the main providers of

agricultural labor in Tanzania and will benefit most from the reduced labor

requirements of CA

The project was centered in Arumeru District in the Arusha region of

Tanzania a highly agricultural rain-fed area The primary conservation tech-

niques are ripper tillers which reduce tillage by cutting furrows into the soil

rather than inverting it completely and the jab planter allows for planting

operations to be done through the soil cover with no tillage Farmer Field

Schools discussed later in this book were the main means of training

Participants in the schools were taught in a hands-on manner about CA

techniques Because CA was expected to have a strong impact on women

women represented the majority of field school participants and women

participants were followed carefully to see how CA affected them

Adoption of CA has three main impacts reduced demand for house-

hold labor increased food security through higher yields and increased

household income The labor effects are especially important in addition

to saving labor for planting mdash predominantly a womenrsquos activity mdash CA re-

quires better coordination of the land preparation and planting so women

and men work together more frequently Lower labor requirements associ-

ated with CA practices affect women and other family members differently

Poor women-headed households benefit from lower labor demands

because a decrease in labor pressures frees family members from the

requirement of working in the field Children can pursue their education

uninterrupted by sudden labor shortages Women in landless households

have fewer opportunities to sell their labor but higher crop yields mdash and

thus higher labor requirements for harvesting mdash could cushion the reduc-

tion in hired-labor opportunities Additional employment opportunities for

rural women laborers as a result of higher yields would have an immediate

effect on household livelihoods

Source The World Bank and the International Fund for Agricultural Develop-

ment Gender in Agriculture Sourcebook (Washington DC The World Bank

2009)


197

further complicated menrsquos and womenrsquos roles as sick people can nolonger work in agriculture women are increasingly assuming produc-tive roles while still being the primary care-giver to the ill

Policy ImplicationsWhy is it important to address gender inequities in society First as anormative concept gender equality is important in its own right Womenought to have equal legal and social status because social justice is animportant indication of development Second many recent studies haveshown that gender inequities slow the process of economic develop-ment Lower status of women is associated with less schooling lostearnings inefficient allocation of labor and poor health of womenand their children12 Over time gender inequities lead to lower nu-tritional and health status of children less educational attainmentand slower growth In agriculture gender is important as one of theseveral socio-economic characteristics that influence the adoptionof new technologies

Since women are important in agriculture their opinions must besought when designing new technologies The impact of these tech-nologies on the relationship between men and women should be con-sidered during this design If women are making production decisionsthey must receive education and guidance from extension services Mostinternational aid agencies such as the World Bank and the United StatesAgency for International Development now recognize that withoutconsidering the roles and responsibilities of women and receiving in-puts during project development these projects are much less likely tosucceed

Third an increasing body of evidence shows that as womenrsquos par-ticipation in the economy grows family well-being improves Incomeearned by women is more frequently used for purchases that broadlybenefit the family such as for health care school fees and food forchildren13

One means of improving income-earning opportunities for womenis to take steps to provide them with inputs such as credit and newseeds Women often have inadequate access to credit for a number ofreasons First in many societies women lack the legal status necessaryto enter into contracts Second only very infrequently do women hold

12 World Bank Engendering Development hellip13 See Norbert Schady and Joseacute Rosero ldquoAre cash transfers made to women spent like

other sources of incomerdquo Economics Letters vol 101 (2008) pp 246ndash8 and CherylDoss ldquoThe effects of intrahousehold property ownership on expenditure patternsin Ghanardquo Journal of African Economies vol 15 (1) (2005) pp 149ndash80


198


title to land often necessary as collateral for loans Third there seemsto be a bias against women in the administration of credit programs

It is likely that most new agricultural technologies are relativelygender neutral and we see some efforts on the part of certain publicextension systems to reach women farmers14 However lack of femaleaccess to credit and purchased inputs in many countries makes manynew technologies gender-biased Furthermore women often grow foodcrops that are minor in terms of value of production but are importantin the diets of families on small farms Agricultural research often ne-glects these crops and this neglect may have adverse effects on nutri-tion In addition because extension services are still highly male in mostcountries communication with female farmers can be inhibited Evenin Africa where women are the majority of farmers males have greatercontact with extension services

The impacts of credit technology and other agricultural policieson women have been exacerbated by discriminatory land reform andsettlement policies In Latin America where land reform and settle-ment schemes often have been designed to benefit ldquoheads of house-holdsrdquo women have been by convention largely excluded In Ethio-pia and Tanzania rights to lands have been bestowed on men In Asiamdash specifically the settlement schemes in Indonesia Papua New Guineaand Sri Lanka mdash land was given only to male heads of householdsInadequate access to land worsened by government policies whencombined with problems of access to credit can hinder womenrsquos abil-ity to participate in agricultural development Given the large role thatwomen play in developing-country farming systems efforts that ig-nore or discriminate against women have distorting effects and dimin-ish chances of success Studies have found that farm fields controlledby women often have lower yields due to lack of access to fertilizer andother resources

Economic development itself can have positive impacts on genderequality The process of development expands job opportunities andthe presence of more capital raises productivity These changes raisethe value of time mdash womenrsquos time as well as menrsquos Development also

14 In The Gambia research on rice was expected to increase womenrsquos income sincewomen were the primary producers Instead following the introduction of newtechnologies men took over this production See Joachim von Braun Detlev Puetzand Patrick Webb ldquoIrrigation Technology and Commercialization of Rice in TheGambia Effects on Income and Nutritionrdquo International Food Policy Research In-stitute Research Report No 75 Washington DC 1989

199

is typically accompanied by more investments in infrastructure such aswater roads and electricity These changes can lower work burdens ofwomen leaving more time for other duties Higher incomes leave moreresources for investments in assets such as human capital As incomesgrow gender disparities in education and health status tend to shrinkPublic investments in schools and health facilities lower the cost of in-vesting in human capital and help shrink gender inequalities In factgender disparities in education are most acute in the lowest-incomecountries and almost non-existent in high-income countries15

Despite strong empirical links between economic growth and gen-der equality equality is not an automatic bi-product of growth and thepath of development can have important implications for gender rela-tions Governments that encourage equal participation and foster rightsof women often find that growth and greater gender equality marchhand in hand Gender equality has beneficial growth effects and growthenhances womenrsquos rights Governments can be proactive by reforminginstitutions to establish equal rights and opportunities for women andmen they can strengthen policy and institutional incentives for moreequal access to resources and participation and they can take activemeasures to confront disparities16 At a minimum they should take stepsto monitor these disparities by measuring womenrsquos conditions


Colombian women receiving instructions on how to vaccinate a chicken

15 World Bank Engendering Development hellip16 See World Bank Engendering Development hellip particularly chapter 6

200


Role of ChildrenChildren represent the future human resource base of a country Eco-nomic growth and development over time depend on how resourcesare invested in children As noted in Chapter 4 children represent cur-rent sources of pleasure for parents and they are a source of invest-ment for future income gains and security in old age Children are amajor source of farm labor in every region of the world and their tasksexpand with each year of their age They typically begin by following aparent or sibling into the field and rapidly become involved in hoeingweeding harvesting and other tasks They feed and otherwise care foranimals They particularly boys may work as low-paid farm laborerson other farms Young girls often care for younger brothers and sistersto free their mother for other work Farm children throughout the worldtake on major farm responsibilities at a very young age

At times conflicts occur between the use of children in farm du-ties and providing income to the family and longer-term investmentsin their education For example in times of household crisis such asdrought or crop failures children may be pulled out of school to lowerexpenses (such as school fees) or increase incomes Such informal riskmanagement techniques can have long-term adverse consequences be-cause the childrsquos lifetime productivity is being compromised by reducedaccess to education Gender inequalities in investments in children havelong-term consequences but depend on social norms and other factorsFor example in many societies in time of crisis decreased spending ongirlrsquos education and even health care and food is a common means ofcoping with household financial stress Such actions lower the status ofgirls and their quality of life but are the product of long-standing cul-tural norms

As adults become ill from diseases such as HIV-AIDS and ma-laria children are called upon to assume a greater share of farm workand other household responsibilities Increased disease burdens espe-cially in sub-Saharan Africa are rapidly changing the roles of childrenand altering social structures in rural areas In fact some argue thatAIDS has increased the vulnerability of entire villages and regions tocrop failure and famine by lowering food production and increasingthe work burden on children These factors subvert livelihood-copingstrategies and mean that in time of need fewer assets are available tohouseholds to help them manage risks17 The epidemic is putting im-mense burden on children

17 A de Waal and A Whiteside ldquoNew variant famine AIDS and food crisis in south-ern Africardquo The Lancet vol 362 October 11 2003

201

Governments recognize the long-term adverse consequences ofusing children to manage household risks and recent experiments withconditional cash transfers are showing these programs to be very effec-tive An example is the PROGRESA program (now calledOportunidades) in Mexico whereby families are given regular butmodest cash allotments on the condition that their children remain inschool and receive regular nutrition and health interventions The pro-gram has proven to be so successful in increasing childrenrsquos educationparticipation reducing drop outs reducing child labor burdens andimproving child welfare that the Mexican government expanded itscoverage so that more than 40 percent of the rural population is nowcovered18 Other similar programs now exist in more than 30 develop-ing countries including virtually every country in Latin America andmajor programs in Bangladesh India Indonesia Turkey and Pakistan

SUMMARYThe overall productivity of the economy depends on the quantity andquality of labor Better-educated individuals earn higher incomes andthese higher incomes reflect greater productivity The underutilizationand low productivity of human resources in agriculture is a serious

18 See International Food Policy Research Institute PROGRESA mdash Breaking the Cycle ofPoverty Washington DC IFPRI 2002


Teenage child and her mother sorting the potato harvest

on a farm in Ecuador

202


problem in many developing countries Better-educated farmers aremore able to adopt new technologies are better able to understand priceand market information and have more access to credit and other formsof capital Education also prepares children for non-farm occupations

Women and children play important roles in agriculture and theseroles vary by region by stage of development and other factors Socialcultural religious technological off-farm employment historical andother factors determine the role of women in farming systems Womenrsquosroles in agriculture have implications for credit and input policies forthe generation and extension of new technologies and for land reformpolicies Gender inequities can have adverse implications for long-termdevelopment inside and outside of agriculture Compelling evidenceshows that governments should take proactive steps to lower genderinequalities

IMPORTANT TERMS and CONCEPTSConstraints faced by women farmersDeterminants of the role of women in agricultureHuman capitalImpacts of education on developmentImpacts of HIVAIDSImplications of the role of women in agricultureMultiple roles of womenPROGRESARegional differences in the roles of womenRole of children

Looking AheadIn this chapter we briefly examined the role of human resources fam-ily structure and women and children in the process of agriculturaland economic development In the next section we consider means forimproving those systems to increase agriculturersquos contribution to hu-man welfare We begin in Chapter 11 by providing an overview of ag-ricultural development theories and strategies before exploring in de-tail the individual components of those theories and strategies

QUESTIONS for DISCUSSION1 How do investments in human capital affect productivity inside

and outside agriculture2 What is the purpose of education for the farmer and his or her

family

203

3 Why should farmers support education if it just means their chil-dren will move out of farming and do something else

4 Why might education be considered a public good5 What are the major types of education6 What roles do women and children play in agriculture7 In which region of the world is the role of women in agriculture the

greatest8 What factors determine the roles of women in agriculture9 What are some important implications of the roles of women in

agriculture10 Why might census statistics and other data undercount female

participation in farming11 Why do women from near-landless and small-holder households

participate more in agriculture relative to those from larger farmswith more land ownership

12 How might gender inequality slow the process of development13 What steps might governments take to address problems of gender

inequality14 How does disease pressure affect the roles of children in farming

RECOMMENDED READINGSBaker Doyle C with Hilary Simms Feldstein ldquoBotswana Farming Sys-

tems Research in a Drought Prone Environment Central Regional Farm-ing Systems Research Projectrdquo in Hilary Simms Feldstein and Susan VPoats eds Working Together Gender Analysis in Agriculture Volume ICase Studies (West Hartford Conn Kumarian Press 1989) chapter 3

Boserup Ester Womenrsquos Role in Economic Development (London Allen andUnwin 1970)

Deere Carmen D ldquoThe Division of Labor by Sex in Agriculture A Peru-vian Case Studyrdquo Economic Development and Cultural Change vol 301982 pp 795ndash811

Folbre Nancy ldquoEngendering Economics New perspectives on WomenWork and Demographic Changerdquo Annual World Bank Conference onDevelopment (The World Bank Washington DC 1995)

Food and Agriculture Organization ldquoWomen in African Food Productionand Food Securityrdquo in J Price Gittinger Joanne Leslie and CarolineHoisington eds Food Policy Integrating Supply Distribution and Con-sumption (Baltimore Johns Hopkins University Press 1987) chapter 7

Gladwin Christine H and Della McMillan ldquoIs a Turnaround in AfricaPossible Without Helping African Women to Farmrdquo Economic Develop-ment and Cultural Change vol 387 1989 pp 305ndash44


204

Glewwe Paul ldquoSchools and Skills in Developing Countries EducationPolicies and Socioeconomic Outcomesrdquo Journal of Economic Literaturevol 40 (2) June 2002 pp 436ndash82

Quisumbing Agnes R Lynn R Brown Hillary Simms Feldstein LawrenceHaddad and Christina Pentildea ldquoWomen the Key to Food Securityrdquo Inter-national Food Policy Research Institute Washington DC August 1995

United Nations Centre for Social Development and Humanitarian AffairsldquoWomen Food Systems and Agriculturerdquo 1989 World Survey on the Roleof Women in Development (New York United Nations 1989) chapter 3

World Bank Engendering Development (New York Oxford University Press2001)

World Bank and the International Fund for Agricultural DevelopmentGender in Agriculture Sourcebook (Washington DC The World Bank2009)


205

PART 4

Getting Agriculture Moving

International Rice Research Institute in the Philippines

206

207

CHAPTER 11

Theories and Strategies

for Agricultural Development

The process of agricultural growth itself has remained outside the

concern of most development economists

mdash Yujiro Hayami and Vernon W Ruttan1

THIS CHAPTER1 Describes how the sources of agricultural growth tend to change as

development occurs and considers how theories of agricultural de-velopment have changed over time

2 Presents the theory of induced innovation as applied to agricultureand its implications for the types of technologies generated and forinstitutional change

3 Discusses how transactions costs and collective action may alter thedirection of technical change with implications for asset distribution

THEORIES of AGRICULTURAL DEVELOPMENTWe have discussed the importance of agricultural development for solv-ing the world food-income-population problem We have consideredthe nature and diversity of existing agricultural systems in developingnations We now need to consider means for improving these systemsto increase agriculturersquos contribution to human welfare In this chapterwe provide an overview of agricultural development theories and strat-egies In subsequent chapters we examine in more detail the individualcomponents of the basic strategies outlined here Our overriding con-cern is to identify strategies that facilitate growth with equity We

1 Yujiro Hayami and Vernon W Ruttan Agricultural Development An International Per-spective (Baltimore Johns Hopkins University Press 1985) p 41

208

PART 4 ndash GETTING AGRICULTURE MOVING

explore why agricultural development has occurred in some countriesand why it has not (or has proceeded very slowly) in others

Many theories have been suggested to explain how the basicsources of growth (labor natural resources capital increases in scaleor specialization improved efficiency education and technologicalprogress) can be stimulated and combined to generate broad-basedagricultural growth2 It is clear from historical experience that the rela-tive importance of alternative sources of growth changes during thedevelopment process and has changed over time for the world as awhole It is also clear that institutional arrangements such as marketingsystems price and credit policies a well-functioning legal system andtransparently enforced property rights play an important role in stimu-lating or hindering development Letrsquos examine agricultural develop-ment theories and evidence to see what lessons they provide for opera-tional strategies

Expand the extensive and intensive marginsOne means of generating increased agricultural production is to ex-pand the use of land and labor resources The development of agricul-ture in North America South America Australia and other areas ofthe world during colonization was based on using new lands In somecases indigenous labor was also exploited The opening up of forestsand jungles by local populations in parts of Africa Latin America andAsia provide additional examples of expanded resource use Econo-mists call this increased use of land and labor expanding the extensivemargin

In many of these historical cases surplus lands and labor wereused to produce commodities for both local consumption and exportReductions in transportation costs facilitated exports In Thailand forexample rice production increased sharply in the latter half of the nine-teenth century and much of the increased production went to exportmarkets In many colonies exports of primary production were extractedfor use in more developed countries and often a large share of the ben-efits of these exports was not realized by the local countries but wastransferred to the developed countries

2 Hayami and Ruttan (Agricultural Development) have characterized previous agricul-tural development theories into six basic approaches (1) resource exploitation (2)resource conservation (3) location (4) diffusion (5) high-payoff input and (6) in-duced innovation The first part of the chapter draws heavily on their ideas

209

CHAPTER 11 mdash THEORIES AND STRATEGIES FOR AGRICULTURAL DEVELOPMENT

Agriculture in Asia is intensive even in hilly regionsExpansion of unutilized land resources provides few opportunities forsubstantial growth in developing countries today In areas of LatinAmerica and Africa where additional land does exist disease insectand soil problems prevent its use in agriculture Abundant labor is avail-able in many countries and continued growth of the labor force willgenerate increases in total agricultural output However most growthin per-capita agricultural output will have to come from more intensiveuse of existing resources

Many methods can be used to achieve more intensive resourceuse Early efforts in England Germany and other European countriesincluded more intensive crop rotations green manuring forage-live-stock systems drainage and irrigation In many developing countriesthese same factors increased land productivity Terracing is an effec-tive means of conserving soil productivity in hilly areas of Asia In themountainous regions of Central America grass strips have been usedto create terrace-like structures that conserve soil and enhance produc-tivity Crop rotations are frequently used to enhance soil productivityand control pests Hayami and Ruttan estimate that agricultural devel-opment based on similar types of ldquoconservationrdquo has been responsiblefor sustaining growth rates in agricultural production in the range of 1percent per year in many countries including developing countriesfor long periods of time3

3 Hayami and Ruttan Agricultural Development p 52

Agriculture in Asia is intensive even in hilly regions

210


While scientists are gaining additional knowledge of the technicaland institutional considerations that can lower the cost of conservationefforts population pressures are creating a need for better ways of sus-taining the natural resource base Hence conservation is likely to playan increasingly important role in maintaining if not expanding agricul-tural production in the future

Another means of intensifying agricultural production is to pro-duce more crops per unit of time through altering cropping patterns orusing shorter season varieties so that two and three crops can be pro-duced per acres per year where one or two was produced before Suchproduction changes usually require scientific input to develop therequired seeds tools or other inputs to make the double or triple crop-ping possible Access to irrigation or surface water sources canfacilitate this intensification

Yet another means of intensification is through a process of diver-sification and production of higher-valued commodities This meansof intensification is likely to become more important as developmentproceeds and incomes grow creating increased demand for higher-valued vegetables and meats Intensity of production can be changedas well by improving transportation systems to bring higher-valuedcommodities to urban centers It has long been recognized that the pat-tern and intensity of agricultural production vary in relation to theproximity of urban-industrial centers and to the quantity and qual-ity of transportation4 Closeness to cities and transport matters becauseof differences in transportation and marketing costs in effects on laborand capital markets in the ease of obtaining new and more productiveinputs and in ease of information flows

One implication of this lsquolsquolocationrdquo theory of agricultural develop-ment is that countries should encourage decentralized industrial de-velopment particularly in the middle and late stages of developmentDuring these stages strong linkages between agriculture and marketsfor inputs (fertilizers and pesticides) and outputs can help stimulatethe local economy Developing nations should improve transportationinfrastructure in rural areas

Diffuse Existing KnowledgeAgricultural development can be stimulated by diffusing knowledgeamong farmers more rapidly within or across national borders Existing

4 Today economists still draw on theories proposed by Heinrick Von Thunen (1783ndash1850) who studied the optimal intensity of farm enterprises in relation to theirdistance to urban areas

211

technologies and economic knowledge can be transferred from the moreprogressive to the lagging farmers thereby increasing productivity Thisidea has provided part of the rationale for agricultural extension sys-tems particularly in farm management Unfortunately in some casesdiffusion theory has led to unrealistic expectations of the size of poten-tial productivity gains under the existing level of technology

Diffusion theory also has led to attempts to directly transfer knowl-edge and technologies from more-developed to less-developed coun-tries More success has been achieved with transferring knowledge thanwith transferring agricultural technologies Adoption of transferred tech-nologies has been limited except where efforts have been made to adaptthe technologies to the new setting

Develop High-Payoff InputsMore recent agricultural development theory builds on these earlierapproaches but adds the important dimension that the process can beaccelerated through provision of new and improved inputs and tech-nologies (particularly improved seeds fertilizers pesticides and irri-gation systems) This approach articulated by Schultz in TransformingTraditional Agriculture is based on the idea discussed in Chapter 7 thatfarmers in traditional agriculture are rational and efficient given theircurrent resources and technologies5 What these farmers need are newhigh-payoff inputs and technologies to increase their productivity6

The need for high-payoff inputs has been widely accepted becauseof the success achieved by modern wheat corn and rice varieties be-ginning in the 1950s and 1960s These varieties are highly responsive tofertilizer pesticides and water management and have resulted in sub-stantial growth in agricultural output in many developing countriesSome have argued that the relative absence of these inputs has beenone factor holding back agricultural development in Africa comparedto other developing regions The distributional or equity effects andenvironmental impacts of these inputs however have been the subjectof much debate and are discussed in more detail in Chapter 12

Hayami and Ruttan argue that the high-payoff input theory is in-complete because it fails to incorporate the mechanism that inducesthese new inputs and technologies to be produced in a country Thetheory also fails to explain how economic conditions stimulate the de-velopment of public agricultural experiment stations and educational

5 Theodore W Schultz Transforming Traditional Agriculture (New Haven Yale Univer-sity Press 1964)

6 Hayami and Ruttan have labeled Schultzrsquos approach the ldquohigh-payoff inputrdquo model


212

systems It does not attempt to identify the process by which farmersorganize collectively to develop public infrastructure such as irrigationand drainage systems In the next section we explore the induced inno-vation theory proposed by Hayami and Ruttan to address these issues

THEORY of INDUCED INNOVATIONInduced innovation theory helps explain the mechanism by which asociety chooses an optimal path of technical and institutional change inagriculture7 The theory says that technical change in agriculture repre-sents a response to changes in resource endowments and to growth inproduct demand Changes in institutions are induced by changes inrelative resource endowments and by technical change8

Induced Technical InnovationTechnical change in agriculture can follow different paths Technolo-gies can be developed that facilitate the substitution of relatively abun-dant and low-cost factors of production for relatively scarce and high-cost factors A rise in the price of one factor relative to others will in-duce technical change that reduces the use of that factor relative to oth-ers For example if the price of land goes up relative to labor and fertil-izer indicating that land is becoming relatively scarce technologies suchas improved seeds will be developed that can be combined with laborand fertilizer to increase production per unit of land

This process of induced technical change is illustrated graphicallyin Figure 11-1 The range of possible technologies in time period 0 canbe represented by what Hayami and Ruttan call the innovation possibili-ties curve I

0 The specific technology employed in that time period is

represented by the isoquant I0 Production occurs at point A with N

0

units of land and L0 units of labor the least-cost combination of those

resources given the price ratio P0 Now if over time labor becomes more


7 Induced innovation theory was developed originally by John R Hicks Theory ofWages (London MacMillan and Co 1932) Hayami and Ruttan during the 1960swere the first to apply the theory to agricultural development Their underlyingassumption is that technological and institutional changes are vital to agriculturaldevelopment

8 Hayami and Ruttan (Agricultural Development p 94) define institutions as ldquothe rulesof society or of an organization that facilitate coordination among people by help-ing them form expectations which can reasonably hold in dealing with others Theyreflect the conventions that have evolved in different societies regarding the be-havior of individuals and groups relative to their own behavior and the behaviorof othersrdquo

213


Figure 11-1 A model of induced technical change If the ratio of the price of

land to labor changes from Po to P

1 incentives are created not only to

substitute labor for land and to move from technology Io at point A to

technology I1 at point B but also to develop a new technology Irsquo

o at point C

Innovation possibility curves Io and I

1 represent the range of potential

technologies that can be applied in period 0 and period 1 (Source Hayami

and Ruttan Agricultural Development)

abundant relative to land so that the price of labor is reduced relative tothe price of land (the new price ratio is represented by P

1) incentives

are created to adopt a more labor-intensive technology If there wereno technical change production might occur at point B on isoquant I

1

However the theory of induced innovation says that incentives are cre-ated not only to select a new technology from the current technologyset (that is move to point B on I

1) but also to develop new technologies

to save scarce resources and use abundant resources more intensivelyThe new technology set is represented by the new innovation possibil-ity curve I

1 As the innovation possibility curve moves toward the ori-

gin the same quantity can be produced at lower cost Following thegeneration of this new technology set farmers can adopt the new least-cost technology 1 and employ N

1 of land and L

1 of labor at point C

214


Hayami and Ruttan compare the agricultural development histo-ries of Japan and the United States to illustrate the validity of the theoryJapan experienced increasingly higher priced land compared to laborand stressed the development of biological technologies such as im-proved seeds and fertilizers These technologies tend to save land anduse labor more intensively The United States on the other hand hasapproximately two times as much land per worker as does Japan Asthe US frontier was moved west land became relatively abundant com-pared to labor and the development of mechanical technologies thatsaved labor was stressed The result was successful agricultural devel-opment in both countries but agricultural output per worker is 10 timesgreater in the United States than in Japan while output per hectare is 10times greater in Japan than in the United States9

Changes in output price relative to an input price also can inducetechnical change as illustrated in Figure 11-2 The curve u representsthe range of current and possible production technologies in a giventime period Hayami and Ruttan call this the meta production functionSpecific production technologies are represented by v

0and v

1 At the

initial fertilizer-output price ratio (P0) producers use technology v

0 and

produce at point A If the price of fertilizer falls relative to the price ofoutput (P

1) then incentives are created to move to point B on the exist-

ing technology If the price ratio P1 is expected to continue farmers

press scientists to develop a more fertilizer responsive variety v1 if it

does not already exist Farmers adopt the new variety and move to pointC In the long run the meta production function itself may shift as morebasic scientific advances are made

Induced Institutional ChangeIncentives are created for technical change but where do these newtechnologies come from How do farmers acquire them What deter-mines whether technologies are developed that are suitable for all farm-ers or only for some of the farmers All of these questions are addressedby the theory of induced institutional change

Farmers demand new technologies not only from private inputsuppliers but from the public sector as well Hayami and Ruttan arguethat public research scientists and administrators are guided by price

9 Hayami and Ruttan Agricultural Development Many developing countries particu-larly in Asia are finding the Japanese path of technical change more appropriatethan the US path given their relative resource endowments and the nature ofchanges in those endowments

215


Figure 11-2 Shift in fertilizer response curve as price ratio changes If the

outputfertilizer price ratio changes from Po to P

1lsquo incentives are created not

only to apply more fertilizer and increase output from A to B using the

traditional variety vo but to develop and adopt a new variety v

1 and to move

to point C Curve u represents the ldquoenveloperdquo of a series of available and

potential crop varieties (Source Hayami and Ruttan Agricultural

Development)

signals and by pressures from farmers The more highly decentralizedthe research system the more effectively these pressures work Researchsystems that welcome and facilitate inputs from farmer groups and thatengage in participatory planning and research are also more respon-sive The development of the research systems themselves can be theresult of pressures from farmers who are responding to market forces

Induced innovation occurs not only in agriculture but in theeconomy as a whole For example as energy and gas prices rise pro-ducers and consumers not only switch to existing more energy-efficient vehicles but press for new types of vehicles that are even morefuel saving The public sector may also respond with laws that requiremore fuel-efficient cars

Many other types of institutions (rules of society or organizations)affect technical change and agricultural development The rights to landmarketing systems government pricing and credit policies and lawsgoverning contracts are just a few The theory of induced institutional

216

10 Share tenure is an arrangement whereby a farmer who is renting land pays the rentwith a fixed percentage of the farmerrsquos output


innovation recognizes that institutions can become obsolete and in needof adjustment over time It says that new technologies and changes inrelative resource endowments or price changes provide incentives fora society to demand new institutional arrangements (see Box 11-1 foran example)

Examples of institutional changes induced by technological changecan be found in the shift from share tenure to more fixed-payment leaseswhich has occurred in several countries as new varieties and irrigationsystems have increased yields while reducing risks10 An example of aninstitutional change due to a change in relative resource endowmentsis the switch from communally owned land to more private forms ofproperty rights as population pressures increase land scarcity

In some countries we observe what appear to be socially desirableinstitutional changes technical changes and relatively rapid and broad-based agricultural development However in others we observe whatseems to be perverse institutional change agricultural stagnation oragricultural growth with the benefits received by only a small segmentof the population Of course many countries fall between these extremesor may move from one group to the other over time Why do we seethese differences in institutional changes that influence agriculturalperformance and how do they relate to the theory of induced innova-tion The answer lies partly with transactions costs and with the incen-tives for and effects of collective action by groups of people with com-mon interests

IMPLICATIONS of TRANSACTIONS COSTS and

COLLECTIVE ACTIONThe induced innovation theory presented above implicitly assumes well-functioning markets for all products and factors Prices are assumed toconvey all the relevant information to decision-makers and resourcesare allocated efficiently and independently of the distribution of assets(such as land) in society Price-responsive producers are assumed topossess knowledge about alternative technologies and be able to lobbyagricultural scientists to develop improved technologies to save scarceresources Assuming no economies-of-scale in production there is oneoptimal path for technological change

217


BOX 11-1

INDUCED INSTITUTIONAL INNOVATION in JAVAIn Java customary rules have governed both land rights and labor ex-

change for many centuries With traditional technologies these rules have

helped allocate resources so that subsistence levels of foods have been

available to all village members These communal institutions have been

put under stress by modern technologies that increase the productivity of

labor and the returns to landowners These changes induce changes in

the institutions governing resource allocation

An example of an institutional innovation is the disappearance of the

bawon rice harvesting system This traditional system allowed everyone

whether they were from a particular village or not to participate in the har-

vest and share the output As population grew with traditional technolo-

gies this purely open bawon system gradually evolved into various forms

some of which limited harvest rights to village residents while others lim-

ited harvest rights to a set number of participants or to people who were

invited by the farmers

The widespread diffusion of fertilizer-responsive rice varieties created

sharply higher returns to harvest labor and induced a remarkable change

in harvest-contract institutions One such innovation was the introduction

of the tebasan system in which standing crops are sold to middlemen who

hire contract labor for harvesting and thus reduce the harvesterrsquos share

while increasing returns to the landowners Another institution is the

ceblokan system which limits harvesting rights to those workers who per-

form extra services such as transplanting and weeding without pay A study

shows that in a village where ceblokan was first adopted in 1964 by seven

farmers by 1978 96 out of 100 farmers had adopted the system

These innovations in harvest-labor institutional arrangements were

largely spurred by increased incomes and higher wages accompanying

technological innovation Increased incomes and wages created incen-

tives for farmers to change their labor-contracting system These changes

are now widespread in Java

Source Masao Kikuchi and Yujiro Hayami ldquoChanges in Rice Harvesting Con-

tracts and Wages in Javardquo Chapter 6 in Hans P Binswanger and Mark R

Rosenzweig eds Contractual Arrangements Employment and Wages in Ru-

ral Labor Markets in Asia (New Haven Conn Yale University Press 1984)

218


Transactions CostsUnfortunately transactions costs affect both factor and product mar-kets creating the possibility of differing optimal paths of technicalchange and of institutional change depending on farm size or otherfactors Transactions costs refer to the costs of adjustment of informa-tion and of negotiating monitoring and enforcing contracts11 Thesecosts arise because assets are fixed in certain uses in the short-run be-cause there is a lack of perfect information because there are differ-ences in the ability to use information and because people are willingto benefit at the expense of others12

The presence of transactions costs may mean for example thatthe cost of credit decreases as farm size increases that labor costs perhectare increase as farm size increases (because of supervision costs)and the cost of land transactions declines as farm size increases There-fore as farm size grows labor use per hectare may decline while ma-chinery use per hectare and the demand for capital-intensive technolo-gies may increase Owners of large farms also maybe quicker to adoptnew technologies because they have fewer credit constraints affectinginput purchases

The presence of transactions costs means that the distribution ofassets matters for the direction of technical and institutional change13

Because the demand for particular types of technical and institutionalchanges will vary by farm size the potential is created for conflictingdemands on the public sector Politicians and other public servants re-spond to the demands of competing groups by considering their ownpersonal gains and losses Consequently a change that would benefitsociety as a whole may not occur if a politician receives greater privategain from an interest group that does not want the change than from agroup that does

11 A succinct discussion of transactions costs is found in Douglas C North ldquoInstitu-tions Transactions Costs and Economic Growthrdquo Economic Inquiry vol 25 1987

12 William J Baumol mdash in ldquoWilliamsonrsquos The Economic Institutions of Capitalismrdquo(Rand Journal of Econometrics vol 17 1986 p 280) mdash points out that if there were nofixed or sunk costs in land capital or people resources could easily be transferredto optimal uses If information were perfect or if people could always figure outhow to design contracts to cover any contingency fixed costs would not matter Ifpeople did not try to profit at othersrsquo expense contracts could be drawn looselyand adjustments made as conditions change

13 See Alain deJanvry Marcel Fafchamps and Elisabeth Sadoulet ldquoTransaction CostsPublic Choice and Induced Technological Innovationsrdquo in Bruce M Koppel edInduced Innovation Theory and International Agricultural Development A Reassessment(Baltimore and London Johns Hopkins University Press 1995)

219


Collective ActionWhen producers of a commodity are few economically powerful andregionally concentrated they may find it easier to act collectively toinfluence public decisions in their favor than if these conditions do nothold Even if the conditions do not hold if a commodity is very impor-tant in the diets of people in urban areas or if it earns substantial for-eign exchange the public sector still may act to help its producers How-ever if producers are neither organized into a powerful collective lobbynor producing an important commodity for urban consumption or ex-port they will seldom receive public help such as new technologiesThis fact may explain why peasant farmers with small land holdingsare often neglected when agricultural research priorities are set

Implications for Induced InnovationThe implications of transactions costs and collective action for the in-duced-innovation model presented earlier are illustrated in Figure 11-3 Changes in the underlying resource base for the country as a wholemight imply that the least-cost path of technical change would occur inthe direction of arrow Z (ie a path that would use relatively abundantlabor and save relatively scarce land) Following path Z might be facili-tated by the development of new labor-intensive biologically-basedtechnologies However if a few large-scale producers due to the pres-ence of transactions costs and collective action were able to influencepublic officials so that technology Irsquo

0 were to be developed rather than

Irsquo1 then technical change might occur in the direction of arrow Y (per-

haps through the development and adoption of capital-intensive me-chanically-based technologies) rather than arrow Z Benefits to the largefarmers would be maximized but overall economic efficiency gainsmight be reduced

The concern over the existence of transactions costs and collectiveaction is not just a concern over the distribution of the benefits of agri-cultural development Rather it is a concern that the rate of economicgrowth itself will be diminished as well If in the previous examplethe farmers demanding path Y were few in numbers and their totalvalue of production compared to the farmers demanding path Z alsowas small then the decision to develop technology along path Y wouldmean a growth rate below the countryrsquos potential

Policy ImplicationsThe above discussion illustrates that technological progress is impor-tant for agricultural development but so too are institutional arrange-ments and information Although the theory of induced innovation

220


provides an optimistic look at how market forces can work almost likean invisible hand to stimulate technological and institutional changethe presence of transactions costs and collective action sound a cau-tionary note that there is an invisible foot out there eager to stomp onthat hand The reality that agricultural and overall economic develop-ment has progressed steadily in some countries while stagnating in oth-ers demonstrates that development is neither automatic nor hopelessAn operational agricultural development strategy is needed that rec-ognizes (a) the role that relative prices can play in guiding technicaland institutional change (b) that imperfect information and other trans-actions costs can sidetrack development unless domestic and interna-tional institutions are proactively developed to constrain inappropri-ate collective action Inappropriate here is defined as actions thatimpose gross inefficiencies on the sector or that fail to meet the equity

Figure 11-3 Induced technical innovation in the presence of transactions

costs The direction of technical change as dictated by changes in relative

factor prices might call for cost-reducing path Z However transactions costs

and collective action may create pressures to follow path Y reducing the rate

of overall economic growth

221


Improved transportation to reduce transactions costs

becomes critical as development proceeds

goals of a society In the sections below several of these institutions arebriefly mentioned they are discussed more thoroughly in subsequentchapters

Domestic institutionsLand credit pricing marketing and research policies are all critical todevelopment and adoption of appropriate technologies and for agri-cultural development in general Sources of agricultural growth changeover time and few countries today are able to achieve substantial pro-duction increases by expanding their land bases In addition land cur-rently in production is being degraded in many countries due to popu-lation and other pressures on a fragile natural resource base Owner-ship of land and other assets is highly unequal in many countries andfragmented in others Hence one institutional component of an opera-tional agricultural development strategy is to reexamine the arrange-ments governing land ownership and use and to make any needed ad-justments

Improved transportation marketing and communications systemsalso become critical as development proceeds Lower transportationmarketing and communications costs can reduce transactions costs andimprove information flows and thereby facilitate broad-based agricul-tural growth Isolated regions tend to be poor regions

222


Provision of high-payoff inputs and credit to finance their pur-chase are additional components of a successful agricultural develop-ment strategy Farmers are rational and relatively efficient given theircurrent resources Consequently new inputs embodying improved tech-nologies are needed to improve the productivity of farmers in develop-ing countries Research and technology-transfer policies can facilitatethe development and adoption of these technologies In addition pric-ing policies should be designed so as not to discourage the use nor en-courage the abuse of improved inputs

Educational levels of farmers also must be increased to improvetheir ability to recognize the benefits of and to use the technologiesEducation improves the capacity of people to assimilate and use infor-mation and thus can help reduce transactions costs

Macroeconomic and International InstitutionsAgricultural development is affected by macroeconomic and trade poli-cies that arise outside the agricultural sector The levels and types oftaxes spending and government borrowing can dramatically influencefarm prices and input costs Exchange rates or the value of the countryrsquoscurrency relative to currencies in other countries can have major ef-fects on domestic agricultural prices and trade

In some countries foreign debt repayments significantly constraingrowth and reduce domestic consumption Internationally influencedinterest rates and prices vary substantially over short periods of timeadding an additional measure of unpredictability to debt levels andnational incomes International labor markets for agricultural scientistsmean that high salaries draw some of the brightest and most educatedscientists to more developed countries and international agencies For-eign aid is a source of capital and technical assistance for some coun-tries but is often unreliable and usually comes with strings attachedDeveloping countries must carefully design macroeconomic and tradepolicies that do not discriminate against their agricultural sector if theyexpect it to grow

Enlightened Self InterestAny operational agricultural or economic development strategy must(1) recognize individual incentives (2) consider the lack of perfect in-formation and (3) include institutional arrangements to offset exter-nalities and other market imperfections Individuals must feel it is intheir self-interest before necessary institutional changes will occur

Information is valuable imperfect and costly to acquire and canexhibit economies of scale in acquisition These attributes of information

223


provide the incentives and the means for some people to use the ad-vantage they have from asset ownership military power or their will-ingness to engage in unscrupulous behavior to acquire informationbefore others

In fact even if all assets were initially distributed equally unlessinformation were available equally to all or unless enforceable ruleswere instituted to constrain dishonest behavior the willingness of someto gain ldquounfairrdquo advantage would eventually lead to unequal distribu-tions of assets In primitive societies information is basically availableto all and inappropriate activities are constrained by social and cul-tural norms However as societies become more complex concurrentlywith economic development information becomes more imperfect andnew institutions are needed to replace the rules that no longer constrainbehavior14

People must feel it is in their interest to design and enforce par-ticular institutional changes and they need to know the implications ofthose changes Institutional change involves costs because some peoplebenefit from current arrangements and will fight any change

The following six suggestions might help lower the cost of institu-tional change through enlightened self-interestbull First in those countries where asset ownership has become so un-

equal that inefficiencies in property rights are retarding agriculturaldevelopment asset redistributions (particularly land) are neededusually with compensation arrangements (so that the changes willin fact occur)

bull Second improvements in education communications and transpor-tation can improve information flows and the ability of a large num-ber of people in the country to act on information

bull Third decentralized industrial growth should lower labor adjustmentcosts (and facilitate employment) reduce externalities associated withurban crowding improve market performances in rural areas andhelp stimulate agricultural growth

bull Fourth social science research can help lower the cost of designingand examining the implications of alternative institutional changesaffecting agriculture

bull Fifth a government structure is needed that includes enforceable lawsto protect citizens from each other and from the government itselfGovernment policies and regulations can also be used to reduce

14 These ideas are similar to those expressed by North (ldquoInstitutions Transactions Costsand Economic Growthrdquo) pp 420ndash5 North notes that impersonal exchange withthird-party enforcement is essential for economic growth Third-party enforcementimplies that legal institutions exist

224


market failure Well-functioning and transparent legal systems withindependent judiciaries can help facilitate transition toward enhancedinstitutions

bull Sixth improved and enforceable international laws and other institu-tions are needed to reduce incentives for international abuses of power

SUMMARYSeveral theories of agricultural development have been proposed overtime Expansion or conservation of resources diffusion use of high-payoff inputs and induced innovation are some of the major ones Tech-nical and institutional changes are key components of any operationalagricultural development strategy These changes can be induced byrelative price changes resulting from change in resource endowmentsand product demand Because of transactions costs collective actionand the realities of human behavior agricultural sectors may not fol-low an economically efficient development path The distribution ofassets has important implications in the presence of transactions costsand collective action If land is unequally distributed then because oftransactions costs the demands (for technologies inputs policies etc)of one group of producers are likely to be very different from those ofothers Collective action can then pull the development process fromits optimal path Institutional changes to improve information flowsand constrain exploitive behavior can become critical to agriculturaldevelopment

IMPORTANT TERMS and CONCEPTSAgricultural research and extension Innovation possibilities curveAsset distribution International factorsAsset fixity and adjustment costs Invisible handCommunications Location theoryCompensation schemes Macroeconomic factorsDiffusion theory Market failureEnlightened self-interest Meta production functionsExternalities Perfect informationHigh-payoff inputs Resource conservationInduced institutional innovation Resource exploitationInduced technical innovation Transactions costs

Looking AheadIn this chapter we considered theories of agricultural development andsuggested a broad framework for operational agricultural developmentstrategies In the following five chapters we consider sector-specific

225


means of generating particular technical and institutional changes tostimulate agricultural growth In later chapters we consider macroeco-nomic and international factors We begin in Chapter 12 by focusing onagricultural research and extension

QUESTIONS for DISCUSSION1 Contrast the resource exploitation resource conservation and

diffusion theories of agricultural development2 Why is the resource exploitation theory of agricultural develop-

ment less useful today than it was historically3 Why has the importance of resource conservation increased is

recent years4 What are the limitations of the diffusion theory of agricultural

development5 Why has the high-payoff input theory become widely accepted6 What criticisms do Hayami and Ruttan make of the high-payoff

input theory7 Describe the theory of induced technological innovation Be sure to

identify both the importance of relative input price changes andchanges in the relative prices of inputs to outputs

8 Describe the induced institutional innovation theory9 Contrast transactions costs and collective actions10 What are the implications of transactions costs and collective

action for institutional innovation11 What do we mean by the term enlightened self-interest12 How might information be made more accessible to farmers13 What are the implications of a grossly unequal asset ownership

pattern for economic growth14 Why are improved international institutions needed for agricul-

tural development15 Why does Japanese agriculture have much higher output per

hectare than US agriculture but much lower output per worker

RECOMMENDED READINGSHayami Yujiro and Vernon W Ruttan Agricultural Development An In-

ternational Perspective (Baltimore Johns Hopkins University Press 1985)Chapters 3 and 4

Koppel Bruce M ed Induced Innovation Theory and International Agricul-tural Development A Reassessment (Baltimore and London Johns HopkinsUniversity Press 1995)

North Douglas ldquoInstitutions Transactions Costs and Economic GrowthrdquoEconomic Inquiry vol 25 1987 pp 415ndash228

226


Ruttan Vernon W Technology Growth and Development An Induced Inno-vation Perspective (Oxford Oxford University Press 2001)

Williamson Oliver The Economic Institutions of Capitalism (New York FreePress 1985)

227

CHAPTER 12

Research Extension and

EducationThe man who farms as his forefathers did cannot produce muchfood no matter how rich the land or how hard he works

mdash Theodore W Shultz1

THIS CHAPTER1 Discusses the role of public and private agricultural research in gen-

erating improved technologies and institutions and the effects of thosetechnologies on income growth and distribution and on food secu-rity

2 Describes the major types of agricultural research and factors influ-encing the transfer of research results from one country to another

3 Examines the role of technology and information transfer mechanismssuch as public agricultural extension and non-governmental organi-zations

THE ROLE of AGRICULTURAL RESEARCHA major determinant of growth in agricultural production is the effec-tiveness of agricultural research Through research the productivity ofexisting resources is increased new higher-productivity inputs and waysof producing food are developed and new or improved institutionalarrangements are designed Examples of research outputs includehigher-yielding plant varieties better methods for controlling insectsand diseases increased knowledge about methods for manipulatingplant or animal genes and designs for improved agricultural policiesResearch creates the potential for increased agricultural productionmoderated food prices increased foreign exchange reduced pressure

1 Theodore W Schultz Transforming Traditional Agriculture (Chicago University ofChicago Press 1964) chapter 1 p3

228

PART 4 mdash GETTING AGRICULTURE MOVING

on the natural resource base and many other positive results Letrsquos con-sider in more detail the nature of these effects and the possibilities fornegative as well as positive outcomes

Over time agricultural research has been associated with improve-ments in incomes and reductions in poverty It is estimated that with-out the productivity improvements generated through agricultural re-search an additional 350 million hectares of land about the size of In-dia would have been needed to feed the worldrsquos population growthsince 1960 Productivity gains have thus saved highly erosive fragilesoils reduced deforestation and helped preserve biodiversity2 Spe-cific research successes include a new African rice variety that is moreproductive and better suited to harsh environmental conditions cas-sava varieties that are resistant to cassava mosaic virus and raise yieldsby 10 tons per hectare and enhanced strains of tilapia fish that grow 60percent faster than traditional strains3 Despite consistent evidence ofhigh rates of return to agricultural research pressures to reduce fund-ing for it are frequent

Impacts on Agricultural ProductivityProductivity increases generated through agricultural research imply ashifting upward of agricultural production functions The simple ex-ample of increasing the output per unit of an input say fertilizer isillustrated in Figure 12-1 If a more responsive seed variety is madeavailable through research output produced per kilo of fertilizer mayincrease The research that produced that higher quality seed may beeither public or private or both Public research is conducted in na-tional research institutions public universities or government-sponsored research in private entities Private research is financed byprivate companies

Research and subsequent technical change in agriculture raisesreturns to producers The value of agricultural production added perworker is shown in Table 12-1 for India China Indonesia Nigeria andBrazil (five of the more populous countries of the world) for the timeperiods 1979ndash81 and 1998ndash2000 Despite rapid population growth whichmight be expected to push production onto more marginal agriculturallands agricultural productivity per worker rose substantially in eachof these countries about doubling in China and almost tripling in Bra-zil This same pattern is found in most other developing countries

2 See CGIAR Science Council Science for Agricultural Development Changing Contextsand New Opportunities (Rome Italy Science Council Secretariat 2005)

3 See CGIAR Science Council Science for Agricultural Development for details

229

Figure 12-1 The effect of research on input productivityNew technologies generated through research can shift the

production response function upward

Table 12-1 Agricultural Value-added Per Worker (2000 dollars)

Country 1980 1990 2000 2003

India $273 $348 $389 $406China $163 $245 $346 $349Indonesia $425 $480 $522 $574Nigeria $491 $578 $774 $871Brazil $1113 $1628 $2585 $3227

Source World Bank World Development Indicators On-line Database

although output per capita for the total population has declined in sev-eral sub-Saharan Africa countries where rapid population growth hasoutpaced slow productivity improvements

The examples shown in Figure 12-1 and Table 12-1 are oversimpli-fied in the sense that most new technologies require different mixes ofinputs not all other inputs are held constant Measurement of total pro-ductivity gains due to research requires netting out the cost of any ad-ditional inputs employed with the improved technologies The result-ing total net cost reduction per unit of output produced can then be

CHAPTER 12 mdash RESEARCH EXTENSION AND EDUCATION

230


used to summarize the total productivity effect This total productivityeffect is illustrated in Figure 12-2 New or improved technology shiftsthe original commodity supply curve (S

1) downward to S

2 because the

supply curve is a marginal cost curve and the new technology has re-duced the cost of production The new lower cost of production perunit of output means that more output is produced at a lower priceThis lower price is good for consumers of the product but producersmight be hurt

Many studies have been conducted to estimate the economic re-turns to society from public research investments aimed at achievingthese productivity increases A recent study found more than 1700 dis-tinct estimates of the returns to various research programs around theworld4 A summary of the results is presented in Table 12-2 Individual

Figure 12-2 Effect of research on supply Agricultural research reducesthe cost per unit of output thereby causing the supply curve to shift

down to the right

4 See Julian M Alston Connie Chan-Kang Michele C Marra Philip G Pardey and TJ Wyatt ldquoA Meta-Analysis of Rates of Return to Agricultural RampDrdquo IFPRI Re-search Report 113 (Washington DC International Food Policy Research Institute2000)

231

programs and projects vary widely in their estimated returns but onthe whole agricultural research has been a highly profitable investmentfor the societies that undertake it Both mean and median annual ratesof return are well above government cost of capital or earnings on al-ternative investments National leaders have a responsibility to investscarce public resources in activities that yield high returns

Increased agricultural productivity not only creates the potentialfor higher real incomes to producers through lower costs and to con-sumers through lower food prices but can also help a countryrsquos agri-culture become more competitive in world markets Efficiency gainedthrough higher agricultural productivity can be turned into foreignexchange earnings or savings as a result of additional exports or re-duced imports

The fact that agricultural research has yielded high returns in manycountries in the past does not imply that these returns are guaranteedfor all research systems or types of research Each country must care-fully consider the appropriate type of research organization and port-folio of activities given its resource base and special needs (see Box 12-1 for an example of a research portfolio) This issue is discussed in moredetail below

Distributional and Nutritional EffectsAgricultural producers at different income levels with different farmsizes in different locations and with different land tenure arrangementscan gain or lose as a result of new technologies and institutional changesgenerated through research These gains and losses depend on marketconditions among other factors Consumers are major beneficiaries ofagricultural research due to falling product prices but the benefits theyreceive vary as well by income level and are influenced by the nature ofthe research portfolio Returns to land versus labor are also influencedby research Nutritional implications follow from these differential pro-ducer consumer and factor-income effects

Farm Size and Tenure The issue of whether improved agricul-tural technologies benefit large farms more than they do small farmshas been the subject of substantial debate Farm size is not a major im-pediment to adoption of new biological technologies such as improvedseeds which are the major focus of developing country agriculturalresearch However larger farms do tend to be among the first adoptersof many new technologies probably because it pays large farms moreto invest in obtaining information about the technologies Owners oflarge farms may have more formal education that helps them process


232


TABLE 12-2 Rates of Return to Agricultural Research

by Commodity Orientation

Commodity Number Mean rate Median rateorientation of estimates of return of return

(count) (percent) (percent)

Multicommoditya 436 80 47All agriculture 342 76 44Crops and livestock 80 106 59Unspecifiedb 14 42 36

Field cropsc 916 74 44Maize 170 134 47Wheat 155 50 40Rice 81 75 51

Livestockd 233 121 53Tree cropse 108 88 33Resourcesf 78 38 17Forestry 60 42 14

All studies 1772 81 44

a Includes research identified as ldquoall agriculturerdquo or ldquocrops and livestockrdquo aswell as ldquounspecifiedrdquo

b Includes estimates that did not explicitly identify the commodity focus ofthe research

c Includes all crops barley beans cassava sugarcane groundnuts maizemillet other crops pigeon pea chickpea potato rice sesame sorghumand wheat

d Includes beef swine poultry sheep goats all livestock dairy other live-stock and pasture

e Includes ldquoother treerdquo and ldquofruit and nutsrdquo

f Includes fishery and forestry

Source Julian M Alston Connie Chan-Kang Michele C Marra Philip G Pardeyand T J Wyatt ldquoA Meta-Analysis of Rates of Return to Agricultural RampDrdquoIFPRI Research Report 113 (Washington DC International Food Policy ResearchInstitute 2000) Table 15 p 58

the information and a greater ability to absorb risk Large farms oftenhave better access to the credit needed to purchase modern inputs Mostsmall farms in the same region as large farms do eventually adopt thetechnologies but the first adopters typically receive greater income gainsfrom them Late adopters may be faced with lower producer prices be-cause supplies shift outward as early adopters increase output Of courseeven if all producers in a given region adopted a scale-neutral tech-nology at the same time absolute income differences would widen

233

BOX 12-1

MAJOR TYPES of RESEARCH in the NATIONAL

AGRICULTURAL RESEARCH INSTITUTION in ECUADOR

1 Plant breeding development of new lines and varieties that yield moreand are resistant to insects and diseases maintenance of a germplasmcollection

2 Cultural practices determination of optimal planting densities improvedharvesting methods

3 Crop protection improved methods for control of insects diseasesweeds nematodes including biological cultural and chemical meth-ods

4 Soils and fertilizers development of improved soil conservation meth-ods chemical analysis of soils including macro- and micro-element analysis toxicity studies economic analysis soil conservationand fertilization practices

5 Water management studies of water needs improved irrigation meth-ods salinity control

6 Mechanization design of improved agricultural implements7 Socioeconomics diagnosis of constraints to technology adoption moni-

toring and evaluation of research analysis of farm management prac-tices and opportunities

8 Technology validation on-farm transferring testing and validation ofnew technologies

9 Seed production basic and registered seed production technologiesfor seed production improved vegetative propagation

10 Post-harvest technologies improved methods for storage dryingcleaning packaging and transporting agricultural products

11 Agro-forestry improved systems of agro-forestry and of pasturing for-ests

12 Animal improvement animal breeding introduction and selection ofanimals from outside the country adaptation of animals to different cli-mates

13 Animal health prevention and cure of diseases and external and in-ternal parasites

14 Animal nutrition improved forages analysis of concentrates and othersupplementary feeding programs evaluation of nutritional deficienciesnutritive value of feeds

Source Julio Palomino Planning Director National Agricultural ResearchInstitution Ecuador

The listing below of the major types of agricultural research activities inEcuador provides an example of a typical applied research portfolio for asmall developing country Given its limited research budget the countrymust decide which commodities to concentrate on and how much to em-phasize each type of research


234


because the increased returns per hectare are spread over more hect-ares on larger farms

As noted in Chapter 11 not all technologies and institutionalchanges are scale-neutral For example certain types of mechanical tech-nologies can be used profitably on large but not on small farms Withdifferences in transactions costs large farmers may press research sys-tems for research results suitable for them even if the countryrsquos resourcebase on average would dictate a different type of technology Also whilemany technologies are scale-neutral and some are biased toward largefarms it may be difficult to generate technologies biased toward smallfarms All this implies that reducing transactions costs through im-proved information is important but it also implies that research maynot be the best policy tool for achieving distributional objectives

Tenant farmers represent an important producer group in manycountries It is difficult to generalize about the effects of research on theincomes of tenants versus landlords One might expect that improvedbiological technologies would make labor more productive and thushelp tenants but the distribution of income gains is influenced by otherfactors as well If each landlord has several tenants so that the averagesize of landlord holdings is greater than the average size of tenantsrsquofarms then the average landlord would gain relative to the averagetenant if each received equal shares of income gains per hectare

Contractual arrangements influence the distribution of researchbenefits and the arrangements may change as well as a result of newtechnologies5 If the tenant pays the landlord a fixed share of the outputthe division of any income gains after adopting the new technologydepends on the relative sharing of both output and production costsBut if the tenant pays a fixed amount to the landlord the tenant cankeep the income gains until the landlord raises the rent Often increasesin land productivity are bid into land rents and landshyowners are ableto capture these rents by changing tenancy agreements

Regional Disparities Regional differences in resource endow-ments and basic infrastructure can influence the distribution of researchgains among producers In fact interregional disparities in the net ben-efits from research tend to be larger than intraregional disparities Datafrom India indicate that the new rice and wheat varieties that increasedproduction so dramatically in that country in the late 1960s benefitedprimarily the more productive wheat and rice states Productivity

5 See George W Norton Philip G Pardey and Julian Alston Science Under ScarcityPrinciples and Practice for Agricultural Research Evaluation and Priority Setting (IthacaNY Cornell University Press 1995) Chapter 3

235

increased dramatically in the countryrsquos northern region At the sametime during 1967 to 1976 the central and eastern regions actually haddecreasing rice yields These interregional yield differentials diminishedover time but the technologies clearly benefited certain regions morethan others6 The introduction of modern crop varieties has exacerbatedinterregional disparities in many countries because those technologieshave often required irrigation and greater use of farm chemicals Pro-ducers in dryland areas and regions with poor infrastructure for trans-porting fertilizer have been disadvantaged Broadening the scope ofagricultural research and decentralizing the research structure shouldhelp reduce regional disparities although rates of return on researchaimed at more productive regions are consistently higher than thosefor marginal areas

Producers and Consumers The impacts of technological changeon the distribution of income between producers and consumers de-pend to a large extent on the degree to which quantity demanded re-sponds to price changes If producers face an elastic demand for theiroutput increased supplies will place little downward pressure on pricesso producers rather than consumers capture most of the benefits of theinnovation Export crops for example tend to have relatively elasticdemands and thus new technologies for the production of these com-modities tend to favor producers Many commodities that are basicstaples in the diet have relatively inelastic demands as discussed inChapter 3 The benefits of research on these commodities flow largelyto consumers through lower prices

The poor spend a higher proportion of their income on food andso benefit more than others from any decline in food prices due to re-search-induced increases in food supplies This benefit is received byboth the urban and the rural poor The rural poor are often landlesslaborers who purchase food or small owner-operators or tenants whoretain a large part of their output for home consumption Scobie andPosada found in Colombia for example that while the lower 50 per-cent of Colombian households received about 15 percent of total na-tional household income they captured nearly 70 percent of the netbenefits of the rice research program7 These benefits to consumers flow

6 JS Sarma and Vasant P Gandhi Production and Consumption of Foodgrains inIndia Implications of Accelerated Economic Growth and Poverty Alleviation In-ternational Food Policy Research Institute Research Report No 81 WashingtonDC 1990 pp 17ndash34

7 Grant M Scobie and Rafael Posada T ldquoThe Impact of Technical Change on IncomeDistribution The Case of Rice in Colombiardquo American Journal of Agricultural Eco-nomics vol 60 no1 (February 1978) pp 85ndash92


236


across regions especially where adequate transportation exists anddampen the interregional disparities to producers mentioned above

Land Labor and Capital New technologies allow the same out-put to be produced with fewer resources thus freeing up those resourcesto be used elsewhere in the economy The dual-economy model de-scribed in Chapter 6 illustrated the potential for labor released fromagriculture to become a fundamental source of industrial growth How-ever the effect of technical change on the demand for resources is in-fluenced by the inherent nature of the technology and by the nature ofproduct demand

Some new technologies result in proportionate savings of all in-puts while others save labor and use land or vice versa For example anew machine to cultivate the land may save labor and require a farmerto use more land to justify the cost A higher-yielding rice variety mayrequire more labor but produce more per unit of land If a technology isneutral with respect to its effect on land and labor use and if the de-mand for the product is elastic the demand for both land and labormay grow proportionately following adoption of the technology Thereason is that with elastic demand total revenue increases with a shiftout in the supply curve providing increased returns to all resourcesOn the other hand if product demand is inelastic a neutral technicalchange can reduce the demand for all inputs proportionately

BOX 12-2

THE GREEN REVOLUTIONThe term green revolution was coined in 1968 by William S Gaud formerAdministrator of the US Agency for International Development to describethe dramatic wheat harvests that had been achieved in 1966 to 1968 inIndia and Pakistan The term gained further publicity in 1970 when NormanBorlaug was awarded the Nobel Peace Prize for his research that pro-duced the high-yielding semi-dwarf Mexican wheats that had performedso well in Asia and Latin America At the same time that the semi-dwarfwheats were making their dramatic entry IRRI released new semi-dwarfrice with the same dramatic effect

The big innovation of the green revolution was developing varieties ofwheat and rice that would not fall down (lodge) when nitrogen fertilizerswere applied These new lines of plants also tended to be earlier maturingto produce many shoots (tillers) and to be less sensitive to day length

Source Donald L Plucknett ldquoSaving Lives Through Agricultural Researchrdquo Con-sultative Group on International Agricultural Research Issues in AgriculturePaper No 1 (Washington DC May 1991) pp 9ndash10

237

Most new technologies are biased toward the use of one resourceor another Many of the higher-yielding varieties that comprised theldquoGreen Revolutionrdquo (see Box 12-2) require significantly more labor in-put per unit of land As a result strong poverty-reducing impacts ofthe green revolution were transmitted through labor markets In coun-tries where markets are highly competitive and input prices reflect trueinput scarcity the induced-innovation model presented in Chapter 11predicts that new technologies will be developed to save the relativelyscarce resources However if input prices are distorted externalitiesexist or transactions costs are high technical change will not necessar-ily be biased in a direction that saves the scarcest resources this lsquolsquoinap-propriatersquorsquo bias will thus reduce the rate of overall agricultural growthbelow its potential

Because so many factors influence the effect of new technologieson resource use it is difficult to generalize about the effect of researchon employment on the long-run returns to land and so on One impli-cation is that agricultural research is a relatively blunt instrument forimplementing a policy of distributing income to particular resources

Nutritional Implications Agricultural research can influence hu-man nutrition through several mechanisms First if new technologiesare aimed at poor farmers a high proportion of the resulting incomestreams will be spent on improving the diet If the technologies are aimedat commodities produced and consumed at home the effect will bedirect If the technologies affect export crops produced by small farmsthe extra income may be spent on buying food from others Even if thenew technologies are suitable only for large farms producing exportcrops the influence on nutrition of the poor may be positive if the de-mand for labor increases However this employment effect is not at allcertain and depends on the factor biases discussed above

An important nutritional effect of research comes from the in-creased availability of food at lower prices As supply shifts out againsta downward sloping demand curve all consumers benefit from lowerfood prices that improve their real wages

Research can be used to reduce fluctuations in food supply pricesand income and thereby alter nutrition Some of the severest malnutri-tion occurs in rural areas during years of low incomes due to lowerthan normal production Research on drought-tolerant varieties can helpreduce production fluctuations and help lower malnutrition

It is difficult to draw conclusions about the nutritional implica-tions of a particular portfolio of research activities because the sourcesof nutritional impacts identified above can act counter to one anotherFor example a labor-saving technology used to produce export crops


238


might lower wages and not induce changes in food supply thus mak-ing landless laborers worse off Some concern has been voiced aboutthe nutrition effects of research devoted to export-crop production Ifnumerous producers switch from food crops to export crops then thereis potential for domestic food prices to rise and such a rise would hurtthe urban and landless poor However there is little empirical evidenceof this switch and nutritional levels are perhaps most influenced byresearch that generates the largest income gains particularly if thosegains are realized by low-income producers Therefore focusing re-search disproportionately on commodities with high nutritional con-tent may result in less income than if the research were focused on othercommodities For example improving the productivity of a vegetableexport crop in Guatemala may improve the familyrsquos nutrition more thanimproving the productivity of its maize crop because the former willlead to a greater increase in farm income and therefore the familyrsquosability to buy food

Environmental Effects of ResearchConcerns over environmental degradation in developing countries werediscussed in Chapter 9 Deforestation soil erosion desertification pes-ticide pollution etc have become serious problems in many countriesand research can play a significant role in their solution

First new technologies for mitigating soil erosion providing al-ternative energy sources and substituting for chemical pesticides canbe generated through research Second research can be used to designimproved government policies that provide increased incentives toadopt management practices and help sustain the integrity of the natu-ral resource base Third the higher incomes generated through research-induced productivity increases will put downward pressure on popu-lation growth in the long run Fourth higher income streams will alsoreduce the pressures to abuse the environment in the short run just toobtain food and fuel Finally income growth will create more demandfor environmental quality Thus agricultural research is critically im-portant for encouraging environmentally sound and sustainable agri-cultural growth

Research organizations have been criticized in the past for devot-ing too many resources to research related to modern inputs such asfertilizer pesticides and irrigation Excessive and improper use of theseinputs can cause environmental damage An additional criticism hasbeen that too little research is aimed at resource-conserving technolo-gies such as integrated pest management and methods for reducingsoil erosion There is some truth in these claims although research on

239

sustainable farming practices has accelerated (see Box 12-3) Also mar-ket failures tend to cause an undervaluation of environmental servicesas discussed in Chapter 9 Because of this undervaluation producersand consumers often do not demand resource-conserving technologiesIn the long run one of the best ways to combat forces leading to envi-ronmental degradation is to raise incomes and reduce poverty Researchcan be an effective means of raising incomes though in the short runmore agricultural research should perhaps be aimed at conservingenvironmental resources

Other Research IssuesInstitutional Change Much agricultural research results in new orimproved technologies that are embodied in inputs or methods of pro-duction However agricultural research can be directed toward thedesign of new or improved policies or institutional changes In otherwords agricultural research can help lower the cost of adjusting insti-tutions to the changing physical natural resource economic and bio-logical environments A static or distorted institutional environmentcan be as great a hindrance to agricultural development as can a statictechnology base

Credit policies marketing and pricing policies land tenure rulesand natural resource policies are examples of institutional arrangements

BOX 12-3

RESEARCH and the ENVIRONMENT

THE CASE of the CASSAVA MEALYBUGThe cassava mealybug was accidentally introduced from Latin Americainto Africa in the early 1970s and soon began causing severe damage tocassava crops Because some 200 million Africans depend on cassava asa staple food this damage became a deep concern

Researchers at the International Institute of Tropical Agriculture (IITA)in Africa in collaboration with those at the International Center for TropicalAgriculture (CIAT) in Latin America found a means of biological controlImportation and distribution of the parasitic wasp Epidinocasis Iopez anatural enemy of the mealybug from Latin America has led to dramaticreductions in African mealybug populations with biological methods Noextensive pesticides are required and the small-scale African farmers arefreed from a damaging pest by nature itself

Source John Walsh Preserving the Options Food Productivity and SustainabilityConsultative Group for International Agricultural Research Issues in Agricul-ture No 2 (Washington DC 1991) pp 7ndash8


240


that can be improved through research Institutional changes that im-prove the flow of market information and reduce externalities are par-ticularly important

Public versus Private Sector Research Just because agriculturalresearch is important to development does not imply that the publicsector must carry it out Typically the public sector is heavily involvedin agricultural research in both developed and developing countriesbut the private sector is heavily involved in many countries and in-creasingly so Why does the private sector not provide all the neededresearch There are three basic reasons First individual farms are toosmall to do all their own research although they often cooperate withpublic research institutions and certainly do a great deal of experiment-ing Second and most important for many types of research it is diffi-cult for one firm to exclude other firms from capturing the benefits fromthe research in other words a firm may incur substantial costs in con-ducting research but once the research is completed other firms canmake use of the results without incurring much cost Thus the firm haslittle incentive to do the research in the first place Third many types ofresearch are highly risky so that many firms are hesitant to take therisk for fear of incurring a substantial loss

Certain types of research particularly applied research related tomechanical and chemical innovations are less risky and potentiallypatentable and thus attract sizable private research activity Some typesof biological and soils research on the other hand have historicallybeen more difficult to patent and have thus been primarily conductedin the public sector However the patentability of biological researchhas increased in recent years and has played a major role in the devel-opment of new genetically modified crops and animals As a countrydevelops the research role of the private sector typically increases indeveloping and marketing improved seeds as well as in mechanicaland chemical innovations However there is often a time lag betweenthe development of public sector research and the establishment of sub-stantial private sector research activity One action that a country cantake to promote private research is to establish enforceable propertyrights (patents licenses etc) over research results not just for mechanicaland chemical technologies but for biological technologies as well

Intellectual Property Rights Intellectual property rights (IPRs)refer to legal protections granted for a defined period of time to scien-tific technological and artistic inventions Copyrights trademarkspatents plant breedersrsquo rights and trade secret laws are examples ofways that intellectual property rights are granted Legal systems differ

241

by country and hence the types extent and duration of rights grantedvary as well Patents and plant breedersrsquo rights are the most importantforms of intellectual property protection for agricultural research re-sults and technologies Over time copyrights are becoming more im-portant as well because the databases that contain information aboutplant genes can often be copyrighted

Patents are the strongest type of intellectual property as the patentholder can exclude all others from making using selling or offering tosell the invention in the country while the patent is in force (unlessothers purchase a license to use it) To be patentable an invention mustbe new useful not obvious and be disclosed so that others can pay alicense to use and replicate it Plant Breedersrsquo Rights (PBRs) grant pro-tection to crop varieties that are new distinct uniform and stable Pat-ents and PBRs give a monopoly on commercializing the invention orvariety for a defined period of time which allows the inventor or breederto recover their costs This protection therefore gives them incentives toinvent or breed that they otherwise would not have

Many developing countries are still in the process of developingand implementing an intellectual property protection system for plantsand animals Details of IPR systems vary from country to country butthose who lag behind run the danger that private firms and individualswill be reluctant to develop or sell products with new technologiesembedded in them in their countries Developing countries have grownfearful that as more and more technologies (including genes) are cov-ered by IPRs their people and firms will be discouraged from using thetechnologies and resulting products because of the high costs of licens-ing the technologies or paying for the higher-cost products This issuehas been a topic of discussion and action in multilateral trade negotia-tions since the early 1990s and is discussed more in Chapter 17

NATURE ORGANIZATION and TRANSFER of RESEARCHSome research is very lsquolsquoappliedrdquo and yields immediate practical resultsOther research is more ldquobasicrdquo or fundamental and may not yield re-sults for many years Research systems themselves are organized in avariety of different ways Letrsquos consider the major categories of agricul-tural research and organizational arrangements

Categories of Agricultural ResearchAgricultural research can be categorized into basic research appliedresearch adaptive research and testing Basic research developsknowledge with little or no specific use in mind Studies of evolutiongenetics biochemical processes and so on may discover fundamental


242


principles of substantial significance to more applied researchers butthe specific end use of the research results are often difficult to identifyprior to the research Most basic research is carried out in developedcountries or in the largest of the developing countries

Applied agricultural research is aimed at solving particular bio-logical chemical physical or social science problems affecting one ormore countries or areas in a state or region Development of new plantvarieties methods for controlling specific insects and diseases in plantsor animals and animal nutrition research are examples of applied re-search Applied research may take place at international research cen-ters or in national research systems

Adaptive research takes the results of applied research and modi-fies or adapts them to local conditions within a country or region Aplant variety developed for a broad area may need to be modified for aspecific microclimate Fertilizer recommendations methods for control-ling soil erosion and many other technologies require adaptation tothe local setting Most of this research takes place on local experimentstations or on farms

Ecuadorian scientistsrecording disease data in an

applied pest managementexperiment on plantain

243

Testing research is conducted on local experiment stations or onfarms to assess whether research results from other locations are suit-able for solving local problems Improved pesticides management prac-tices or plant varieties are examples of research results that may betested All countries conduct some testing research but for very smallcountries with limited resources testing may represent a large portionof total research Much testing is conducted by farmers themselves

These categories of research are linked and dependent on each otherA research center may be involved in several categories

BiotechnologyMuch applied and adaptive agricultural research involves what has beencalled biotechnology research Traditional biotechnology research includeswell-established techniques in plant breeding biological control of pestsconventional animal vaccine development and many other types of re-search Modern biotechnology research includes use of recombinant DNAmonoclonal antibodies and novel bio-processing techniques amongothers

Modern biotechnology provides new tools and strategies for in-creasing agricultural production The tools for improving agriculturaloutput range from novel approaches to cell and tissue culture to thegenetic manipulation of biological material Modern biotechnology isbased on several new technologies One of them recombinant DNAoften called genetic engineering enables the essential genetic material incells DNA to be manipulated It offers the possibility of transferringgenetic material from one species to another thereby transferring a use-ful genetic trait Such a transfer is also called transgenics

Another biotechnology technique monoclonal antibodies is usedto detect individual proteins produced by cells thereby providing amethod for rapid and specific diagnosis of animal and plant diseases Athird novel bio-processing technique involves new cell and tissue cul-ture technologies that enable rapid propagation of living cells Thesetechniques provide improved methods for large-scale production ofuseful compounds by the microbial or enzymatic degradation of vari-ous substrates

Modern biotechnology is also used to map out the location andfunctions of genes in individual species By identifying whether ldquomark-ersrdquo on a chromosome exist for a specific gene or genes that control atrait of interest a process called marker-assisted breeding can be used tospeed up the breeding process to incorporate a useful trait in a newvariety


244


The types of products that modern biotechnology can potentiallyproduce include new plant varieties new animal breeds plant and ani-mal growth hormones bio-pesticides bio-fertilizers diagnostic reagentsfor plant and animal diseases and enzymes and food additives Theymay improve the tolerance of plants and animals to particular pestsand stresses such as drought and increase the efficiency with whichplants and livestock utilize nutrients or increase a plantrsquos nutritionalquality (for example rice with increased vitamin A or iron) They mayreduce the need for agrichemicals

Modern biotechnologies are on the cutting edge of science and ifdeveloping countries are to be successful in developing their own mod-ern biotechnologies or adapting technologies produced elsewhere theywill need scientists trained in microbiology and biochemistry Thesecountries will need to integrate modern biotechnology into traditionalbiotechnology research programs They will need to put in place or re-fine bio-safety rules and to resolve rules on intellectual property rightsas the rights to many aspects of the technologies are patented and ownedby private companies

Benefits and Costs of Modern Biotechnology Concerns have beenexpressed by some about the health and environmental safety of mod-ern biotechnologies especially for the technologies that involve trans-ferring genes across species All technologies involve some risks andeach country needs to develop and implement a regulatory system thatallows it to test and monitor the safety of its new agricultural technolo-gies The risks associated with modern biotechnologies are thought tobe relatively low and many of the technologies can have positive ef-fects on health and the environment through effects on reducing pesti-cide use However there can be no certainty that adverse health andenvironmental effects will not occur Consumers especially in Europehave expressed strong reservations about consuming foods producedwith the use of biotechnology One concern has been the possibilitythat genes say from a herbicide-tolerant crop might transfer throughpollen to another species creating perhaps a super-weed that would bedifficult to control with a herbicide Gene transfer across species doesoccur frequently although odds of creating a super-weed are slimAnother concern is whether people may have an allergy to a transgeniccrop A third concern is whether people should be attempting to alternature although many types of agricultural research in addition to ge-netically modified organisms could be subject to this same concern

Economic concerns have also been raised with respect to whethera few companies might end up controlling many of the intellectualproperty rights associated with the genes and to the transformation

245

processes thereby gaining some monopoly power If they did gain suchpower they might charge farmers a high price for their seeds Coun-tries however can regulate companies and have their public researchsystems enter into joint ventures with the private sector to ensure free-dom of access to seeds at reasonable prices

Biotechnologies are just one of many potential means of increas-ing agricultural productivity in developing countries and perhaps thegreatest danger is that developing countries forgo the food and incomegrowth that the technologies may afford them8 In 2008 approximately125 million hectares of transgenic crops mdash about 8 percent of the totalcrop area in the world mdash were grown in 25 countries 15 of them devel-oping countries However planting of transgenic crops in Africa hasbeen limited to South Africa and Burkina Faso to date

Some have feared that the new seeds will cost too much for farm-ers in developing countries as private firms attempt to capture theirresearch costs through only selling seeds of crops that are hybrids orthat have a ldquoterminator generdquo embedded in them Hybrids or termina-tor genes would force farmers to purchase new seeds each time theyplant or the seeds will not grow Due to the concerns being raised onthis issue seed companies have not employed the terminator gene al-though they have emphasized hybrids to protect their investment Thepublic sector has also been involved in biotechnology research in manycountries to help ensure that transgenic seeds are available at a reason-able price or for open-pollinated varieties for which seeds can be savedand replanted

Several studies have documented potentially large economic ben-efits that would accrue from increased use of biotechnologies in devel-oping countries9 These benefits would be realized by consumersthrough lower food prices and through increased nutritional qualityProducers might also gain through lower costs of production If devel-oping countries do not pursue agricultural biotechnologies they maybe placed at a competitive disadvantage compared to countries that dopursue them However transgenic technologies are certainly not theonly means of improving crop productivity and many others such as

8 See Per Pinstrup-Andersen and Ebbie Schioler Seeds of Contention (Baltimore JohnsHopkins University Press 2000) for a more detailed discussion of issues surround-ing biotechnologies and developing countries

9 See for example Clive James Global Status of Commercialized BiotechGM Crops 2008ISAAA Brief No 39 (Ithaca NY ISAAA 2008) and Guy Hareau George NortonBradford Mills and Everett Peterson ldquoPotential Benefits of Transgenic Rice in AsiaA General Equilibrium Analysisrdquo Quarterly Journal of International Agriculture vol44 (2005) pp 229ndash46


246


marker-assisted breeding will also be increasingly important in the fu-ture both because they are less controversial but also because regula-tory costs related to ensuring bio-safety are lower

Organization of Agricultural ResearchPublic agricultural research systems in developing countries have avariety of organizational structures Often there is a central station andseveral substations located in different geo-climatic zones Research maybe conducted at universities but the proportion of agricultural researchconducted at colleges and universities tends to be much less than indeveloped countries such as the United States

The structure of the research system is influenced by historicalforces including among others colonial history and major foreign as-sistance projects Much agricultural research in developing countries isorganized along commodity program lines for example a maize pro-gram a rice program a wheat program or a sheep and goats programOther cross-cutting research areas such as soil fertility socioeconomicsand even plant or livestock protection may have separate programs

Some agricultural research systems have a mandate for extensionor other programs designed to reach out to farmers Even if extension isnot included in the mandate of the national research institution thatinstitution still needs a mechanism to obtain information on the currentproblems facing farmers and for testing new technologies under actualfarm conditions This mechanism may involve on-farm research

Each research system must determine the appropriate mix of on-farm and experiment-station research Experiment station research isneeded so that experiments can be run under controlled conditions thatenable particular components of new technologies to be developed andtested without the confounding of numerous and possibly extraneousfactors However the real-world robustness profitability and culturalacceptability of new technologies cannot be assessed without testingunder actual farm conditions Frequent contact between scientists andfarmers increases the likelihood that constraints and problems facingfarmers will be included in the development and evaluation of newtechnologies Because extensive on-farm interaction is expensive andscientific resources are scarce in developing countries each researchsystem assesses at the margin the appropriate mix of on-farm or on-station research

International Agricultural Research Centers The 1960s saw theemergence of a set of international agricultural research centers (IARCs)that has now grown to a network of 15 institutions located primarily inAfrica Asia Latin America and the Middle East as shown in Figure

247

12-3 The funding and operation of these ldquoFuture Harvestrdquo centers iscoordinated through the Consultative Group for International Agricul-tural Research (CGIAR) headquartered at the World Bank in Washing-ton DC Although the first center The International Rice Research In-stitute (IRRI) was founded in 1960 the international center model drewon the historical experiences of the colonial agricultural research insti-tutes that were effective in increasing the production of export cropssuch as rubber sugar and tea The model also drew on the experiencesin the 1940s and 1950s of the Rockefeller Foundationrsquos wheat and maizeprograms in Mexico and the Ford and Rockefeller foundationsrsquo rice pro-gram in the Philippines The results of the research and training programsof the centers are aimed not just at the country where the center is locatedbut at the neighboring region or even the world

The first IARCs IRRI and CIMMYT (International Center for Maizeand Wheat Improvement) produced new varieties of rice and wheatthat substantially increased yields especially for rice in Asia The firstof several rice varieties (IR-8) released by IRRI and cooperating na-tional programs responded to high rates of fertilizer and water appli-cation by producing more grain and less straw Subsequent researchhas focused as well on improving grain quality incorporating diseaseand insect resistance and developing varieties for drier upland areasThe substantial yield boost experienced in parts of Asia in the late 1960sresulting from these new technologies was termed the Green Revolu-tion (see Box 12-2)

The success of the green revolution in increasing yields and in-comes in many areas led to the expansion of the international agricul-tural research center concept to the other commodities and regions iden-tified in Figure 12-3 Maize millets tropical legumes cassava livestockpotatoes and many other commodities have received emphasis Theresearch results from these newer centers have not been as spectacularas the early gains in rice and wheat but these centers too have madesignificant contributions For example disease-resistant beans cassavaand millet varieties are now being grown in several countries Thesecenters also provide a public link between research being undertakenin the private sector on modern biotechnology and national agricul-tural research systems in developing countries to help ensure that thesenational systems are not left behind

To some extent the dramatic breakthroughs in yields in the earlyyears of the green revolution created unrealistic expectations that thesegains would be repeated with regularity Agricultural research is infact a continuous process that generally produces small gains from yearto year


248

The overall program and core funding for all 15 centers is man-aged by an organization called the Consultative Group for InternationalAgricultural Research (CGIAR) whose members include the WorldBank the Food and Agricultural Organization of the United Nations(FAO) the United Nations Development Program (UNDP) and sev-eral national governments regional banks and foundations These in-stitutions provide the funds for the centers The CGIAR founded in1971 is centered at the World Bank The total budget for the 15 FutureHarvest Centers was $520 million in 2007 when all funding sources areconsidered In addition to these centers there are a few related interna-tional research centers that play a similar role such as the World Veg-etable Center in Taiwan and the International Center for Insect Physi-ology and Ecology in Kenya


Figure 12-3 The ldquoFuture Harvestrdquo International Agricultural ResearchCenters (See facing page)

249


Research Center ndash See Figure 12-3 Research Coverage

Africa Rice (formerly WARDA) Rice and rice-based cropping systems in Africa

Bioversity (formerly IPGRI) Conservation of plant genetic materialbananas and plantain

CIAT mdash Centro Internacional de Phaseolus beans cassava rice Agricultura Tropical tropical pastures

CIFOR ndash Centre for International Forest systems and forestry Forestry Research

CIMMYT ndash Centro Internacional Wheat barley maize de Mejoramiento de Maiz y Trigo high-altitude sorghum

CIP ndash Centro Internacional Potato sweet potato other root crops de la Papa

ICARDA ndash International Center for Crop and mixed farming systems Agricultural Research in research with emphasis on sheep Dryland Areas wheat barley broad beans

ICRISAT ndash International Crops Sorghum pearl millet pigeon pea Research Institute for chickpea groundnuts the Semi-Arid Tropics

IFPRI ndash International Food Policy Food Policy Research Institute

IITA ndash International Institute for Farming systems Cereals grain Tropical Agriculture legumes roots and tubers

ILRI ndash International Livestock Livestock diseases and production Research Institute systems

IRRI ndash International Rice Research Rice Institute

IWWI ndash International Water Irrigation Management Institute

World Agroforestry Agroforestry

World Fish Center Fisheries and other living aquatic resources

Transfer of Research ResultsThe discussions of research categories of national and regional experi-ment stations and on-farm research and of international agriculturalresearch centers all imply that research results may be transferred fromone location to another These transfers can occur internally in a coun-try or across national boundaries Let us examine the possibility andadvisability of transferring new technologies or institutions

250

10 See Yujiro Hayami and Vernon W Ruttan Agricultural Development An InternationalPerspective (Baltimore Johns Hopkins University Press 1985) pp 260ndash62

11 See Robert E Evenson and Hans P Binswanger ldquoTechnology Transfer and ResearchResource Allocationrdquo in Hans P Binswanger and Vernon W Ruttan eds InducedInnovation Technology Institutions and Development (Baltimore Johns HopkinsUniversity Press 1978) chapter 6 This section draws heavily on the ideas in Evensonand Binswanger


Prior to the 1960s little attention was focused on the importanceof indigenous agricultural research in developing countries It wasthought that the possibilities for transferring technologies from devel-oped countries were substantial and that therefore extension programswere needed to assist in this transfer The relative lack of success withdirect transfer of machinery plant varieties and other materials fromdeveloped to developing countries led to the realization that improveddeveloping-country research capacity was essential The desire to im-prove location-specific research was one of the driving forces behindthe development of the IARCs mentioned above However many re-search results are regularly transferred from one country to anotherWhat types of research results are transferable and what determinestheir transferability

Materials such as improved seeds plants and animals scientificmethods formulas and designs genes and basic research output areall potentially transferable to some extent10 Each country must decidewhether to simply screen these items and attempt to directly transferthem to screen them and then modify and adapt them to their ownenvironment or to undertake a research program that is comprehen-sive enough to produce its own technologies11

The choice among these transfer and research options will dependfirst on the relative costs of direct transfer of technology and of adap-tive and comprehensive research Transfer of research results involvescosts of information and screening or testing There may also be licensecosts or fees for patented items Most of these transfer costs increasewith the physical size and environmental diversity of the country Acountryrsquos own research costs are somewhat independent of size forthat reason it may be more cost effective for larger countries to con-duct their own research than for smaller countries

Second the complementarity between screening transferred tech-nologies and conducting in-country research can come into play It takessome scientific capacity just to bring in and screen research results fromoutside the country Therefore it may be cost-effective to have thesescientists do some of their own adaptive research

251


Third if the natural resource base in one developing country issimilar to that in another country where the new technology is pro-duced then the chances of transfer will increase New wheat varietiesfor example are often transferred from Argentina to Uruguay becausethose countries have similar wheat-growing regions These similaritiestend to reduce the cost of transfer and to increase the likelihood that thetransferred technology will be physically and economically viable

Fourth some technologies are more environmentally sensitive thanothers are For example new plant and animal materials may be moreenvironmentally sensitive than more basic research results formulasdesigns etc The International Agricultural Research Centers attemptto produce plant and animal materials that have broad environmentalsuitability In many cases it is necessary for the receiving country tothen adapt these materials more specifically to its microclimates Rela-tively basic advances in modern biotechnology have the potential forwidespread applicability if the scientific and institutional capacities arecreated in developing countries to enable them to effectively utilize theresearch results

Fifth the availability of research results to transfer in is also im-portant For example if a country has low labor costs and high capitaland land costs yet the technologies available to transfer in are largemachines suitable for a resource environment with high labor costs and

On-farm potato variety trial of the International Potato Center (CIP)

252


abundant land then the country will not find the outside technologysuitable

In summary a developing country must assess several factors indeciding whether to transfer in research results from another countryor from an international center Agricultural research is a long-terminvestment Research takes time adoption of new technologies takestime and research results eventually depreciate as insects and diseasesevolve the economic environment changes and so on Developing coun-tries often attempt to bring in research results from other countries dur-ing the early stages of development in order to shorten this process andmeet critical needs Perhaps a 1 percent productivity growth rate canbe accomplished through a relatively simple transfer process thoughsuch productivity will depend on the conditions previously mentioned12

However the requirements of modern rates of growth in food demandoften in the 3 to 6 percentage range require the coexistence of at leastsome indigenous agricultural research capacity and this capacity maybe a combination of public and private

Agricultural development today requires a research system withinternal and external linkages that bring in appropriate technologiesscreen adapt and produce new technologies and institutions and per-form both on-station and on-farm testing The major components ofsuch a research system are illustrated diagrammatically in Fig 12-4National and local experiment stations must interact with on-farm re-search and extension This national research system also must maintainties with the international research centers Research in the larger na-tional systems feeds into both the international centers and the smallernational research systems If any of these linkages is weak or missingagricultural productivity growth will be slowed

Agricultural Research SpendingSpending on agricultural research occurs in both the public and privatesectors In the developing countries the public sector undertakes morethan 90 percent of agricultural research with the bulk of that researchoccurring in the Asia and Pacific region (see Table 12-3) In 2000 morethan $23 billion was spent in developed and developing countries onpublic agricultural research with roughly a third ($75 billion) of thoseexpenditures occurring in the developing countries in the Asia and Pa-cific region In contrast only a little over 6 percent of the total was spentin Africa and the percentage spent there has been declining since 1980Total spending on agricultural research in Africa has increased only


253


TABLE 12-3 Total Public Agricultural Research Spending by Region

Agricultural Shares inRampD spending global total

(millions 2000 dollars) (percentages)

1981 2000 1981 2000

Asia and Pacific 3047 7523 200 327 (28 counties)

Latin America and 1897 2454 125 108 Caribbean (27 countries)

Sub-Saharan Africa 1196 1461 79 63 (44 countries)

West Asia and North Africa 764 1382 50 60 (18 countries)

Subtotal developing countries 6904 12819 454 558 (117 countries)

Subtotal high income countries 8293 10191 546 442 (22 countries)

Total (139 countries) 15197 23010 1000 1000

Source CGIAR Science Council Science for Agricultural Development ChangingContexts and New Opportunities (Rome Italy Science Council Secretariat 2005)

Figure 12-4 Components of a well-linked agricultural research systemfor developing countries

254


about one percent per year over the past several years despite increasedmalnutrition in the region13

Agricultural research has become increasingly concentrated in ahandful of countries worldwide14 The United States Japan France andGermany accounted for more than two-thirds of the agricultural re-search in developed countries in 2000 while China India Brazil Thai-land and South Africa accounted for more than half of the developingcountry total If private support for agricultural research is includedthe disparities in funding identified above are even sharper with Af-rica accounting for less than one percent of total funding on agricul-tural research15 These numbers place increased importance on the tech-nology transfer issues raised above

ROLE of EXTENSION EDUCATIONCountries unable to develop the skills and knowledge of their farmersand their families find it difficult to develop anything else The utiliza-tion of new technologies and institutions is critically dependent on aworkforce that is aware of them and understands how to use themAgricultural extension education can help motivate farmers towardchange teach farmers improved decision-making methods and pro-vide farmers with technical and practical information Extension iscomplementary to other sources of information because it speeds upthe transfer of knowledge about new agricultural technologies and otherresearch results It helps farmers deal with technological and economicchange Thus as agriculture in a country moves from a traditional to amore dynamic science-based mode the value of extension educationincreases

In extension education farmers are the primary clientele and theprograms are mostly oriented toward production problems they faceExtension accelerates the dissemination of research results to farmersand in some cases helps transmit farmersrsquo problems back to research-ers Extension workers provide training for farmers on a variety of sub-jects and must have technical competence economic competence farm-ing competence and communication skills Thus extension workersrequire extensive training and retraining to maintain their credibilitywith farmers

13 CGIAR Science Council Science for Agricultural Development14 CGIAR Science Council Science for Agricultural Development15 See Philip G Pardey Nienke Beitema Steven Dehmer and Stanley Wood Agricul-

tural Research A Growing Divide (Washington DC IFPRI 2006) p 1

255


Organization of ExtensionMany types of organizational structures for extension exist in develop-ing countries A highly structured approach encouraged by the WorldBank and applied in several countries is called the training and visit (TampV)system The TampV system includes a single line of command a set sched-ule of visits to farmersrsquo groups regular and continuous training of ex-tension officers and workers by subject-matter specialists and no non-extension responsibilities16 The TampV system facilitates discipline ac-countability and research linkages and experienced apparent successin some countries for a period of time

Another more common extension structure is the village agentmodel that assigns extension ldquoagentsrdquo to live in villages and provideone-on-one and group training of farmers on a variety of agriculturaltopics An example that illustrates this structure is the extension ser-vice of the Colombian National Coffee Federation That service has ex-tension agents who operate on a fixed schedule of visits to farmersrsquogroups and who spend one day a week in an office receiving farmersand scheduling individual farm visits that coincide with days whenthey are visiting a particular location Village extension agents are sup-ported by regional subject matter specialists who also spend most oftheir time visiting farmersrsquo groups and individual farms Village exten-sion agents are drawn from coffee farms and receive three years of train-ing after high school Extension programs are planned six months aheadand are developed jointly between the farmersrsquo group and the agent

Unfortunately both the TampV and the village agent structures forextension have an uneven history of success The TampV system suffersfrom its high cost and the disadvantage of not having local agents whocan respond to farmer concerns as they arise The village system suffersfrom the difficulty of funding a sufficient number of agents and ad-equately supporting them with supervision and training Too often ex-tension agents are poorly trained and little-motivated They may notvisit enough farms and they become diverted into non-extension ac-tivities The extension service itself may become politicized corruptand unconnected to research A well-functioning system needs clearlines of authority adequate training and financial rewards for person-nel or the system becomes relatively ineffective Research and exten-sion linkages are also essential and are facilitated if research and extensionare housed in the same institution Unfortunately often they are not

16 See Daniel Benor James A Harrison and Michael Baxter ldquoAgricultural ExtensionThe Training and Visit Systemrdquo World Bank Washington DC 1989 for moredetails

256


In recent years many public extension services especially in LatinAmerica have been eliminated or seen their funding cut drasticallyThese cuts were caused by a combination of budgetary pressures andperceptions that the extension services were not particularly effectiveAs a result of these and other inadequacies in publicly supported ex-tension systems non-governmental organizations (NGOs) are increas-ingly involved in agricultural extension NGOs exist outside financialsupport from governments with support from private individuals andgroups in other countries or on private local support In addition pri-vate firms that sell products such as improved seeds and chemicals areheavily involved in technology transfer associated with their specificproducts

Extension MethodsA variety of methods are employed to transfer research knowledge andtechnologies to producers Individual farm visits regularly scheduledgroup meetings technology demonstrations that may involve a fieldday when hundreds of farmers are invited to observe the latest researchresults and transfer of information through mass media are just someof the methods Some technologies are transferred more effectivelythrough intensive methods such as regular meetings other are ame-nable to transfer through less intensive (and usually less expensive)methods such as field days and mass media Each country must decidewhat is most cost effective for its public extension system and eachNGO will decide which approach allows it to best achieve its objec-tives There is no one method that works best in every situation Exten-sion costs and effectiveness will depend on the type of technology ty-pography of the country access to mass media cultural and social fac-tors and many other variables

SUMMARYAgricultural research generates new or improved technologies and in-stitutions that increase agricultural productivity moderate food pricesgenerate foreign exchange and reduce pressures on the natural resourcebase Most studies have found the economic returns on public agricul-tural research investments to be high Agricultural research can havedistributional effects by farm size and tenure by region by income levelby factor of production and so forth Consumers particularly low-income consumers are major beneficiaries of agricultural research asthe poor may spend 80 percent of any income increases on food andfood prices tend to fall as productivity increases Agricultural researchcan influence nutrition by raising farm incomes lowering food prices

257


and reducing the variability in food production Agricultural researchcan generate technologies institutional changes and higher incomesthat lead to reduced pressures on the environment The public sectorhas a role to play in agricultural research because the private sector hasinadequate incentives to conduct a sufficient amount of socially benefi-cial research in part because often private firms conducting researchcannot capture enough of the benefits Intellectual property rights canhelp in creating incentives for private research investment

Agricultural research can be classified into basic applied adap-tive and testing research These categories are linked and dependenton each other Research is conducted on national and local experimentstations and to be effective must contain an on-farm component Since1960 a system of International Agricultural Research Centers (IARCs)has provided new technologies and institutional changes suitable toseveral developing countries These institutions helped to produce agreen revolution that greatly increased the production of maize riceand wheat Research can be transferred across national borders but theease of transfer depends on the type of research the relative cost oftransfer and indigenous research the natural resource base and otherfactors Use of modern biotechnology has grown around the world inrecent years but is yet to be widely adopted in developing countries

Many types of extension systems exist some more structuredthan others Training for extension workers incentives clear lines

Extension field day in Peru

258


of authority and strong linkages to research are each critical for aneffective extension service

IMPORTANT TERMS and CONCEPTSAdaptive research Green revolutionAgricultural education Intellectual property rightsAgricultural extension International agriculturalAgricultural productivity research centersAgricultural research Scale-neutral technologyApplied research Technology transferBasic research Testing researchBiotechnology Training and visit systemExperiment stations

Looking AheadThis chapter considered technical factors that can influence develop-ment of the agricultural sector The following several chapters addresssets of institutional issues that are equally important if agriculture is toprogress in developing countries We begin in the next chapter discuss-ing land and labor policies

QUESTIONS for DISCUSSION1 What is the purpose of agricultural research in developing coun-

tries2 How does research influence agricultural productivity and food

prices3 Under what conditions might research on a nonfood export crop

have as much or greater positive effect on nutrition than researchon a food crop

4 Why might agricultural research tend to benefit large farms morethan small farms

5 Why might agricultural research increase the regional disparity inincome in a developing country

6 Why are consumers especially poor consumers often the majorbeneficiaries of agricultural research

7 What factors influence the returns to particular factors of produc-tion following research

8 How might agricultural research help improve the environment9 How might research result in institutional change10 Why should the public sector get involved in research Why not

leave it to the private sector

259


11 Distinguish among basic applied adaptive and testing research12 What is modern biotechnology13 What are the International Agricultural Research Centers and

how does their work tie into the agricultural research systems indeveloping countries

14 What is the ldquogreen revolutionrdquo when did it occur and where15 What role does extension play in agricultural development16 How might research education and extension be complementary

activities17 How can intellectual property rights influence production of

agricultural technologies

RECOMMENDED READINGSAlston Julian M George W Norton and Philip G Pardey Science Under

Scarcity Principles and Practice for Agricultural Research Evaluation andPriority Setting (Ithaca NY Cornell University Press 1995)

Benor Daniel James Q Harrison and Michael Baxter ldquoAgricultural Ex-tension The Training and Visit Systemrdquo World Bank Washington DC1989

CGIAR Science Council Science for Agricultural Development Changing Con-texts and New Opportunities Rome Italy Science Council Secretariat 2005

Masters William A ldquoPaying for Prosperity How and Why to Invest inAgricultural Research and Development in Africardquo Journal of Interna-tional Affairs vol 58(2) 2005) pp 35ndash64

Pardey Philip P Nienke Beitema Steven Dehmer and Stanley WoodAgricultural Research A Growing Divide (Washington DC IFPRI 2006)

Pinstrup-Andersen Per and Ebbe Schioler Seeds of Contention (BaltimoreJohns Hopkins University Press 2000)

Ruttan Vernon W Agricultural Research Policy (Minneapolis Universityof Minnesota Press 1982)

Scobie Grant M and Rafael Posada T ldquoThe Impact of Technical Changeon Income Distribution The Case of Rice in Colombiardquo American Jour-nal of Agricultural Economics vol 60 February 1978 pp 85ndash92

260

CHAPTER 13

Land and Labor Markets

The distribution of rights in land relates to the distribution of powerincome social status and incentives A land reform that changesthis distribution is by definition a change that shakes the roots andnot the branches of a society mdash Philip M Raup1

THIS CHAPTER1 Discusses the meaning of land tenure and land reform2 Explains why land reform and flexible land tenure systems are

often necessary for agricultural development yet difficult toachieve and what the requisites are for a well-functioning landmarket

3 Describes the nature of agricultural land and labor markets indeveloping countries

MEANING of LAND TENURE and LAND REFORMLand and labor are fundamental inputs into agricultural productionand while land is often distributed unequally labor is not Thereforewe see large farms with land concentrated in the hands of a few andsmall farms with excess labor Typically a market develops in whichlabor is hired to work on larger farms or land is leased to small-scalelandholders for rent or for a share of the output An alternative is tosubdivide large holdings through land reform or market-based redis-tribution efforts In this chapter we consider determinants and conse-quences of alternative land tenure systems and labor market structuresWell-functioning land and labor markets are crucial to agricultural de-velopment because land is a major input into production and poorly

1 Philip M Raup ldquoLand Reform Issues in Developmentrdquo Staff Paper P75-27 Depart-ment of Agricultural and Applied Economics University of Minnesota St Paul1975 p 1

261

functioning markets will lead to misallocation and inefficient use ofthis valuable resource Evidence shows that the rural poor particularlythose with little or no land will benefit more from an additional unit ofland than will the rich mechanisms to reallocate land can increase pro-ductivity and reduce poverty

Land rights determine social and political status as well as eco-nomic power in developing countries Secure access to land can en-hance incomes provide an important insurance function and increaseaccess to financial and non-financial services Land tenure is a term usedto refer to those rights or patterns of control over land Land rightsinclude rights to use and to exclude use rights to output from the landand rights to transfer the land or its output to others

As population density increases farming techniques change andmarkets for agricultural products grow pressures often develop tochange existing land tenure arrangements In societies where land hasbeen held in common permanent and enforceable individual rights toland may evolve In countries where ownership patterns are highlyskewed with a few people owning much and many owning little or noland pressures often are exerted on the government to undertake a landreform or eliminate constraints to more equal land distribution by es-tablishing well-functioning land markets These pressures may arisefrom peasants who desire increased economic well-being or from thosein power who hope that minimal concessions to the peasants will dif-fuse political unrest A land reform is a dramatic attempt to change theland tenure system through public policies Land reform may changenot only rights and patterns of control over the land resource but alsothe mode of production (whether semi-feudalistic capitalistic or so-cialist) and the agrarian class structure Consequently few subjects re-lated to agricultural development are as controversial In recent yearsmore attention has been focused on rights to land and how secure rightsfacilitate development of functioning land markets Market-based mea-sures have supplanted administrative approaches to land reallocations

Land Ownership and Tenure SystemsA wide array of land ownership and tenure systems exists in the worldThese systems reflect differences in historical influences levels ofincome culture political and legal systems climate and other factorsThe systems vary in size and organization of land holdings they affectincentives to produce and invest and they influence the distribu-tion of benefits from agricultural growth Examples of average size oflandholdings from around the world are presented in Table 13-1 Thelarger holdings in Latin America compared to Asia and Africa are

CHAPTER 13 mdash LAND AND LABOR MARKETS

262


particularly evident However information on average land holdingsmasks important difference within countries these differences areshown in Table 13-1 as gini coefficients2 While average holdings forexample in Latin America are quite high many landless and near land-less families can be found in rural areas of the region Latin Americahas the most unequal distribution of land in the world while the distri-bution in Asia and Africa is relatively equal (see Table 13-1) In LatinAmerica as elsewhere in the world the colonial past still influencesland ownership patterns today (see Box 13-1)

Family farms corporate farms state farms and group farms aremajor types of farm ownership but organization of farm enterpriseswithin these types can vary substantially In many cases the owner ofthe farm is also the operator In other cases those who operate or workon the farm may earn a fixed wage or pay rent in cash or in a share ofthe farm output to the owner

Small subsistence or semi-subsistence family farms are commonin developing countries Families often provide most of the labor andcultivation is labor-intensive Much of the output is consumed on thefarm where it is produced However not all small family farms aresubsistence or semi-subsistence farms many are commercial farms pro-ducing substantial surpluses for sale Those farmers that do consumemost of what they produce are usually very poor In some cases familymembers work on other farms or in non-farm employment The lattercan lead to the small farms becoming part-time operations especiallyas development proceeds over time with job opportunities growing inthe non-farm sector

Large-scale commercial family farms sell most of what they pro-duce While in developed countries these farms are highly mechanized

2 The gini coefficient is a widely used measure of inequality that ranges from 0 (com-plete equality) to 1 (complete inequality)

Table 13-1 Median Holding Size by Region

Region Median Holding Gini Coeffient Size (Ha)

East Asia 207 51Sub-Saharan Africa 218 49South Asia 232 59Mideast and North Africa 605 66Eastern Europe 869 62Latin America 1770 81

263

BOX 13-1

COLONIALISM and LANDOWNERSHIPMany of the landownership patterns found in developing countries are thevestiges of colonial rule The latifundia or extensive large-scale farms thatcurrently exist in Central and South America alongside minifundia or verysmall farms are a direct descendent of colonial rule The Spanish andPortuguese colonizers allocated large tracts of land to elites who formedtropical plantations or large haciendas Both types of landholding were madepossible through the direct enslavement of indigenous populations theimportation of slaves from Africa or the encomienda system that gaveindirect control over local populations to certain elites

Some of the richest agricultural lands in Africa have landownershippatterns that were established during the periods of European coloniza-tion Because European countries coveted exotic tropical products suchas cocoa coffee tea and tropical fruits agricultural production in Africawas reorganized to help ensure production of these products Large land-holdings were allocated to European settlers such as the tea and coffeeplantations in eastern Africa rarely were the landrsquos original inhabitants com-pensated In many instances the landrsquos original inhabitants were resettledto areas with lower agricultural potential poor rainfall and inadequate in-frastructure Areas that had been self-sufficient in food production becameexporters of goods to Europe while much of the indigenous populationrelied on rain-fed agriculture in marginal areas An adequate labor supplywas maintained sometimes through enslavement and sometimes througheconomic coercion

In Asia colonial rule led to similar forms of plantation agriculture Japa-nese colonies in Korea and Taiwan produced for export to Japan the Dutchcolonized Indonesia Spanish plantations existed in the Philippines theBritish colonized much of the Indian sub-continent and other regions

Following the end of colonial rule many of these landownership pat-terns persisted because of the political powers of the landed elite Someof the land reforms undertaken prior to 1970 were designed to remove theless desirable aspects of these landholding patterns Implicit forms of en-slavement of labor such as through the maintenance of indebtednesswere prohibited In many countries the result of these reforms has been toreduce labor use increase mechanization and leave the distribution ofland largely unchanged The legacy of colonial landholding patterns hasbeen pervasive rural poverty in many regions of the world


and often involve only a small amount of non-family labor in develop-ing countries the operations are usually more labor-intensive and use ahigh proportion of hired labor The owner frequently does not live onthe farm but pays a manager to oversee day-to-day operations

264


Corporate farms often produce a limited number of commoditiesin large-scale units These farms may have their own processing andmarketing systems This type of farm is more prevalent in developedthan in developing countries but there are numerous examples of largecorporate farms in developing countries The fruit plantations found inCentral American countries banana plantations of the Philippines andcocoa plantations of West Africa are a few examples

State farms are usually large owned and operated by the govern-ment and run by hired labor Managers are responsible to a govern-ment-planning agency that may set targets for production and directthe timing and method of key farming operations Examples have ex-isted recently in parts of China and the former Soviet Union State farmsusually suffer from inadequate incentives and ill-advised managementdecisions

Group farms are communes kibbutzim collectives or othertypes of farms that are operated by a group of people who work andmanage the farm jointly These group operations may also involve non-agricultural activities Often collectivized farms are characterized byover-investment in labor-saving capital-intensive technologies since in-dividuals do not receive the full returns from their labor Special ar-rangements may be devised (for example a point system) to provideincentives for individual members to work harder The kibbutzim ofIsrael are an example of a group farm system Cooperative farms exist insome parts of the world but cooperative purchase of inputs and mar-keting of outputs is a more common organization The Mennonites inthe Paraguayan Chaco are an example of privately held land whoseowners organize cooperatives for input purchases and productmarketing

Not only do many types of land ownership and organization ex-ist but also types of tenancy or leasing arrangements Farm familiesmay lease all or a part of their land for a specified amount of cash or fora share of the production from the land A farmer may be allowed tofarm a piece of land in exchange for his or her labor on another part ofthe ownerrsquos land In some countries the village tribe or national gov-ernment may own the land and grant use rights to individual familiesThis system is common in Africa where social groups allocate land toindividuals who maintain control over it and its output as long as theycultivate it

Tenancy arrangements affect the risk and transactions costs borneby tenants and landlords and influence incentives to work or applyinputs A share lease for example spreads the production risk betweenthe landlord and tenant while a cash lease concentrates the risk on the

265

tenant A cash lease implies lower transactions costs for the landlordthan a share lease since the amount received under the share lease hasto be measured and production has to be monitored A tenant mayhave less incentive to apply additional fertilizer or even labor under ashare lease than under a cash lease To circumvent this disincentivethe landlord may share the cost of the fertilizer or place conditions onthe amount of labor applied In such cases the landlord bears the trans-actions costs associated with monitoring input use and measuring thevalue of output Thus the use of a particular land- or labor-contractingmechanism may be a response to the presence of risk or transactionscosts These factors can explain why the land market may not dictate asingle type of tenancy system even within a single country (see Box 13-2)

Types of Land Tenure ReformBecause many types of land tenure systems exist in the world there aremany types of land tenure reform Prior to the 1970s many if not mostland reforms involved a movement away from feudalistic and semi-feudalistic land tenure arrangements toward capitalist or socialist own-ership modes3 Feudalism was characterized by large-scale estates con-trolled by the traditional landed-elite with labor bonded to the estatesthrough peonage or extra-economic forms of coercion

Anti-feudal land reforms have eliminated feudalism in most ofthe world and the farm types described above have replaced feudal

Cowsfeedingat aKibbutzin Israel

3 See Alain de Janvry ldquoThe Role of Land Reform in Economic Development Policiesand Politicsrdquo American Journal of Agricultural Economics vol 63 (May 1981) pp 384ndash92


266


BOX 13-2

TENANCY RISK and TRANSACTIONS COSTS THE CASE of

SHARECROPPINGSharecropping is a widely practiced form of tenancy whose existence

can be attributed to risk sharing and transactions costs Because agricul-tural production is risky and both tenants and landowners desire to sharerisks sharecropping represents a compromise between fixed-rent con-tracts where the renter bears all the risk and wage employment wherethe landowner bears all the risk Sharecropping also represents a responseto the costly supervision of workers Since under a wage system the workerreceives wages based on hours worked rather than effort expanded thereis a tendency to shirk Supervision is necessary yet costly Sharecroppingreturns some of these incentives to the tenant and also allows risk sharing

models In many countries however this post-feudal order has resultedin some large capitalist farms or estates controlled by an elite well-to-do class and a coexisting small-farm sector In a few countries (for ex-ample South Korea and Taiwan) the post-reform agricultural sectorconsists primarily of small family farms And in a few such as Cubasocialist farms still predominate The form of the post-reform agrarianstructure depends largely on the motivation and political ideology be-hind the reforms

Land tenure reform today generally does not refer to the types ofanti-feudal reforms instituted in many countries prior to the 1970s Inthose reforms prohibition of bonded labor and reductions in labor ex-ploitation were achieved but in many cases a significant redistributionof land was not As de Janvry notes countries like Colombia Ecuadorand India had successful anti-feudal land reforms but very little redis-tribution of land4 Land tenure reform as a policy issue today usuallyrelates to seeking a shift in the distribution of lands from large to me-dium-size and smaller landholdings It also involves creation of moresecure rights to land Improved security empowers households to makebetter decisions more effectively manage risks and participate on amore equal basis in markets Land tenure reform often involves mar-ket-based efforts to increase access to land and well-defined securerights to land are needed for a well-functioning land market

In the few remaining countries where socialist or group farms pre-dominate (as opposed to capitalist farms of whatever type) future landreforms may involve a transition to increased capitalism as these coun-tries struggle with the incentive problems that have plagued many types

4 Alain de Janvry ldquoThe Role of Land Reform in rdquo

267


of group farms (see Box 13-3) Land reforms in socialist countries aredifficult to achieve without a fundamental restructuring of the politicalsystem The change in China from the socialized agricultural system tothe market-based Household Responsibility System in 1979 was accom-panied by political and economic upheaval

Transactions Costs and the Agrarian StructureNo form of land tenure is universally efficient Differences in naturalresource endowments in the availability of new technologies and ininstitutional arrangements all influence risk transactions costs and thefarmerrsquos opportunity to exploit his or her managerial ability If therewere well-defined private property rights and a reasonably equitabledistribution of land perfect information and zero transactions costs(especially the cost of enforcing contracts) markets would work per-fectly and it would not matter as much what type of agrarian struc-ture prevailed Bargaining would occur among landowners rentersand laborers neither the returns to labor nor the overall economic effi-ciency of the agricultural system would depend on the type of agrarianstructure

In the real world however risk varies from country to countryMarkets are not perfect The cost of acquiring information and of nego-tiating monitoring and enforcing contracts can be high People arewilling to exploit others labor hired on a time-rate basis may shirk (in-creasing the cost of supervision) the price of land may decline as farmsize grows (due to fixed costs associated with land transactions) andlarger landowners may have better access to markets and information

Many of these risk and transactions cost factors confer an economicadvantage to large farms Owners of larger holdings can gain addi-tional political advantage through collective action and can reinforcetheir advantage through the tax laws and pressures on the types of newtechnologies produced by the public research system Owners of largerholdings have easier access to agricultural credit because the costs ofadministering a loan can be spread over more land thus making thecost per hectare of large-scale loans lower than small-scale loans Theresult can be additional gains for the elite but reduced economic effi-ciency for the agricultural sector and the country as a whole Land ten-ure reform may be needed in these cases

ACHIEVING SUCCESSFUL LAND REFORMA country can desire land tenure reform for a variety of economic so-cial and political reasons yet land reform whether it involves changein land tenancy or ownership is always difficult to achieve Letrsquos

268


examine briefly why land redistribution may be desired why it may bedifficult to achieve how a country can measure whether a reform hassucceeded and what factors improve the chances of achieving success-ful land tenure reform

BOX 13-3

LAND REFORM IN EASTERN EUROPEFollowing the collapse of Soviet-style models of central economic planningand control and the movement toward democracy in the late 1980s gov-ernments in Eastern Europe were faced with the problem of how to reformtheir agricultural sectors The organization of the agricultural sectors inthese countries was rather similar approximately one-third of the farmswere state farms and two-thirds were collectives (cooperatives) Most farmemployees managed a household plot of about one-half hectare while thestate farms and collectives were large about 2000 to 3000 hectares Twopaths of reform are illustrative of general trends in the region Romaniaand Bulgaria

In both countries the rights of landowners prior to collectivization wererecognized by parliamentary decree in February 1991 These decrees alsoestablished procedures for reclaiming these property rights In Romanialand redistribution proceeded quickly Local land commissions were estab-lished to hear household claims for up to 10 hectares Some proof of theclaim was needed Whenever possible claimants were given back theland actually owned and when not an alternative of equal size and qualitywas returned Once in possession the owner could sell it immediately orpurchase more land Thus a market for titled land with very few institu-tional restrictions was established There was not an attempt to createfarms of optimal size

The Bulgarian redistribution proceeded much more slowly Adminis-trative delay hindered progress and local commissions were very slow informing The laws implementing the distribution were very rigid and theconstruction of ldquoappropriate size holdingsrdquo through administration was at-tempted The local commissions adjudicated claims but a planning teamreassigned plots The law prohibited the purchase and sale of land forthree years which hindered development of a land market

In both cases most of the new landowners remained integrated intothe collective management system In Romania the formation of a landmarket opened a period of holdings consolidation and resale but actualexit from the collective was delayed until the infrastructure for individualmanagement was developed The slowness of the redistribution in Bul-garia guaranteed the existence of collective systems for many years

Source Karen Brooks J Luis Guasch Avishay Braverman and Csaba CsakildquoAgriculture and the Transition to Marketrdquo Journal of Economic Perspectives

vol 5(4) Fall 1991 pp 149ndash62

269

5 See Dwayne Benjamin ldquoCan Unobserved Land Quality Explain the Inverse Produc-tivity Relationshiprdquo Journal of Development Economics vol 46 (1995) pp 51ndash84


Need for More Equitable Access to LandThe broad economic and development goals of most societies includedesires for improved income growth (efficiency) equity (income distri-bution) and security (political and economic stability) A more equi-table access to land and more secure rights to land can contribute to allthree of these goals

A skewed distribution of landholdings can hamper economic effi-ciency for several reasons Large landholdings may not be farmed in-tensively even in very densely populated countries in fact an inverserelationship between farm productivity and farm size has been foundin many developing country settings5 Some landowners hold land forspeculative reasons Others are absentee landlords who provide littlesupervision of those working on the farm If the farm is owned by thegovernment planning and management may be centrally and poorlycontrolled and individual incentives may be stifled since farms areforced to respond to output and input quotas Large farms may substi-tute machinery for labor exacerbating an unemployment problem Largefarmers facing labor supervision problems often demand capital-ntensive innovations from the agricultural research system As a resultnew technologies are generated that do not reflect the true scarcity val-ues of land labor and capital in the country

Countries with large landholdings often have a coexisting sectorof farms that are too small to provide an adequate living These verysmall holdings of one or two hectares or less may have labor employedto the point at which its marginal product is very low Thus reducingthe size of large farms and increasing the size of very small farms maybe the only way to raise the marginal product of labor in agricultureand thereby raise income per worker

As discussed earlier other land tenure problems including theneed for tenancy reform may have to be solved to improve entrepre-neurial incentives and to reduce risks facing farmers For example aspopulation density increases property rights for land pastured in com-mon may need to be redefined to avoid overgrazing Share or cash rentsmay need to be changed as new technologies become available Leaselengths may need to be more securely established to encourage capitalinvestment

Apart from growth or efficiency concerns land redistribution of-ten is needed for equity reasons The number of landless laborers isgrowing rapidly in many countries along with associated poverty and

270


6 See Clive Bell ldquoReforming Property Rights in Land and Tenancyrdquo World Bank Re-search Observer vol 5 (July 1990) pp 143ndash66

malnutrition The principal resource these people control is their laborwhose value is depressed by under-use of labor on large farms Provid-ing land resources to these people can be an effective means of raisingincomes As large farms are broken up even those poor who do notreceive land can benefit due to increased economy-wide demand forlabor Large farms convey political power to a small group This groupmay distort economic policies in a direction that hinders overall eco-nomic growth and creates severe hardship on the poorest segments ofsociety Thus to achieve development as defined in Chapter 1 address-ing the land distribution problem may be necessary

In addition to growth and equity concerns land redistribution canenhance political and economic security or stability In fact expropria-tions of land and partial land reforms experienced in many countries inthe past have probably occurred primarily for purposes of political sta-bilization This stabilization can have positive and negative impacts oneconomic growth and equity To the extent that land redistributiondampens political unrest and reduces the chances of revolution it re-duces the chances of a countryrsquos experiencing the extremes of deathand suffering that can accompany a revolution However to the extentthat a partial land reform achieves political stability without redistrib-uting enough land or economic power to generate widespread growthand fundamentally reduce economic hardship and hunger it may onlyperpetuate a status quo of chronic suffering

Why Redistribution of Access to Land is Difficult to AchieveBecause of the political and economic power that accompanies land-ownership in many countries it is difficult to conduct a meaningfulredistribution of land Historically land reforms have most often beenmade possible only after significant social upheaval caused by revolu-tion the overthrow of colonial powers or war In the former SovietUnion and China social revolutions destroyed the power of the landedelite prior to the institution of collectivizing land reforms An army ofoccupation enforced the socialist reforms in Eastern Europe followingWorld War II The extreme economic political and social turmoil ofthe 1970s in China and of the 1980s and 1990s in the Soviet Union andEastern Europe once again created the conditions for land reforms inthose countries In capitalist countries such as Japan the Republic ofKorea and Taiwan defeats in war or occupation were followed by re-distributive reforms6

271

In countries with capitalist forms of social and economic relation-ships land reforms are difficult to achieve because those holding theland rights also have strong political power Urban consumers oftenalign with landowners Because large farms frequently have large mar-keted surpluses consumers fear that steep food price increases mayfollow a dramatic reform Small changes may be supported as a meansof political stabilization but large-scale restructuring of property rightsis difficult Occasionally governments support redistributive land re-forms in response to strong revolutionary pressures such as Mexico(1940 to 1977) or the Philippines (1972 to 1975) Or land reforms resultfollowing military overthrows of the government such as in Peru (1969to 1975) Land reforms within capitalist agriculture are usually slow tooccur because compensation is required if they are to be accepted bythose losing land Unless the governmentrsquos budget has a large fiscalsurplus which is rare in developing countries or substantial foreignaid gainers cannot compensate the losers sufficiently for the land re-form to be politically viable

Resistance to large-scale administrative land reforms has beenstrong so that such reforms often only follow major upheavals Deci-sion makers in many countries however realize that an inequitabledistribution of land is not conducive to broad-based economic growthAs a result we see more experimentation with land market reformswhich begin with legislative steps to increase security of private landholdings Over time markets are created and land may move from lessto more productive uses through sales or rentals

Many countries have had land reforms in the sense that changesin the land tenure system have occurred The mere fact that a changehas taken place does not necessarily imply that a successful land reformhas transpired Many national leaders are interested in land reform be-cause the reform may lead to increased political stability Howeverunless there is evidence that incentives have been created for farmersto undertake hard work and increase their capital investment and un-less poverty has been reduced and social status improved for the ruralpoor a successful land reform has not occurred

A successful land tenure reform should alter the incentive struc-ture in rural areas It should provide secure property rights that arerecognized by all Whether this structure has been altered is perhapsbest measured by evidence of increased and continuous capital accu-mulation by small farmers in the form of livestock farm buildingsequipment and other improvements in land resources Because theseinvestments may be small in any one year it usually takes a generation


272


BOX 13-4

LAND RESETTLEMENT and REFORM in ZIMBABWEPrior to its invasion in 1890 land in Zimbabwe was held under communaltenure and tribal leaders allocated rights to land Members of Cecil RhodesrsquoPioneer Columns were promised 3000-acre holdings in exchange for as-sistance in colonizing the area During the subsequent colonial period NativeAfricans were relocated to low-rainfall low-productivity land and were barredfrom landownership outside these tribal reserves Large-scale resettlementwithout compensation continued through the early 1950s

In 1965 the minority white government declared independence fromGreat Britain and continued enforcing restrictive conditions against NativeAfricans The subsequent war of independence which raged in the bushwith increased intensity through the 1970s used the ldquoland questionrdquo as auniting principal Overcrowding and dwindling production on communallands led to widespread rural poverty The Lancaster House Agreementswhich paved the way for independence in 1980 formed a basis for post-independence land reform The British government allocated pound44 millionfor purchase on a ldquowilling seller willing buyer basisrdquo Robert Mugabe wonthe first free election and promised to resettle blacks on purchased whitelands Resettlement reduced civil conflict provided opportunities for warvictims and the landless and relieved some population pressures on com-munal lands

Between 1980 and 1990 the government obtained some 3 millionhectares for resettlement and resettled roughly 54000 households Thepace of resettlement slowed through the 1980s as attention moved to-wards providing agricultural services to communal areas Farms in resettle-ment schemes had variable performance many of those under privatemanagement did relatively well while those that were managed undercooperative schemes performed less well Critics of the resettlement pro-gram however noted that the most productive farm areas had beenldquoresettledrdquo by the Presidentrsquos political supporters

The Lancaster House Agreements expired in 1990 effectively endingdonor support of resettlement Through the mid-1990s few farms wereresettled and government attention turned toward restoring macro-economic balance and dealing with adverse consequences of severedrought Following a major currency devaluation in late 1997 unrest grewand independence war veterans began to demand access to land Gov-ernment responded by listing some large-scale commercial farms for ldquocom-pulsoryrdquo resettlement Although owners would be compensated the methodof compensation was unclear and abandonment of the ldquowilling buyer-will-ing sellerrdquo principle caused unease among owners of land and donorsldquoListedrdquo farms were said to be ldquounderproductiverdquo although governmentcritics disputed many of these assertions Between 1997 and 2000 re-settlement became more contentious as rural interest groups increasedpressure on the government through protests and forced seizure of white

273

farms In response to internal political pressure government began a ldquofasttrackrdquo resettlement process between 2000 and 2003 government acquiredmore than 75 of the nearly 4500 white-owned commercial farms By theend of 2003 fewer than 300 white farmers continued to farm

Resettlement in Zimbabwe provides a number of lessons Inequitableland access can create strong political forces particularly following politi-cal change The issue of compensation for lands remains complicatedWhile some white farmers obtained their lands through ancestral succes-sion (their forebears had received land at no cost) many had purchasedtheir land from others and were due fair compensation for their invest-ments As internal political pressure and the economic crisis grew theMugabe government felt increasing urgency for resettlement while re-sources to finance land purchase became scarcer

Land reforms of the type practiced in Zimbabwe can have huge unset-tling effects As commercial farmers were forced out agricultural produc-tion and export earnings dropped by more than 50 further exacerbatingeconomic problems and contributing to near famine conditions Neighbor-ing countries absorbed many of the displaced white farmers spreadingsocial problems around the region The politicization of the process dam-aged the credibility of government and undermined popular support (athome and among donors) for the program

Source William Masters Government and Agriculture in Zimbabwe (WestportConn Praeger 1994) updated by press reports

BOX 13-4 continued

perhaps 25 to 30 years to truly evaluate the success of a change in landtenure or redistribution

Agricultural productivity also should increase in the long runHowever in the first five years following a land reform productivitymay stagnate for a couple of reasons First the mix of commoditiesproduced may shift toward food crops and away from a heavy relianceon cash crops This shift and other disruptions to the normal input andoutput marketing channels credit flows changes in technologies neededfrom the agricultural research system and so forth can hinder produc-tivity growth in the short run

Marketable surpluses may decrease because the poorer segmentsof the rural population who benefit from the land reform have a highincome elasticity of demand for food As their incomes increase throughmore access to land they consume more and the aggregate marketedsurplus may decline Thus short-term increases in agricultural produc-tivity or marketable surpluses are not good measures of the success ofland reform


274


A land reform also can affect capital formation in the public sec-tor Countries with land tenure systems in need of reform often havepoor rural schools and other public infrastructure Large-scale land-owners typically hesitate to tax themselves to support schools roadsand so on Countries in need of land reform usually find it easier tocollect public revenues by taxing export crops or by placing tariffs onimports Governments implementing land reform have an opportunityto restructure the tax system The new owners of small plots have in-creased ability to pay taxes and may do so willingly if they see that thetax system is honest and the proceeds will be used for schools roadsand other local infrastructure

Peasant associations and other farm groups also are likely to beformed after a successful land reform These associations can play animportant role in promoting the development and adoption of new tech-nologies for agriculture improving marketing channels and so forthThe formation of these associations therefore is another test of a suc-cessful land reform

Alternatives to Land ReformThe cost and political difficulty of attaining an effective land reformhave led to alternatives to large-scale administrative redistribution oflands There is now an increasing body of evidence showing that mar-ket-based reforms are effective at increasing investments increasedproductivity and more equitable outcomes7 Examples of market-basedland redistribution efforts include fortification of sales and rental mar-kets encouraging cooperatives to redistribute lands to their memberssales or transfer of government lands and creation of land banks8 Theseefforts generally require three complementary steps (i) legal definitionand assignment of property rights (ii) creating the legal framework forefficient functioning of the markets themselves and (iii) insuring thatcomplementary markets particularly finance and insurance functionefficiently These steps can be costly and difficult and a market-basedreform that does not address all will likely fail in its objectives mdash toredistribute land toward more efficient users

7 See Klaus Deininger and Songquing Jin ldquoTenure Security and Land-Related Invest-ment Evidence from Ethiopiardquo European Economic Review vol 50 (July 2006) pp1245ndash77 and Klaus Deininger and Songquing Jin ldquoLand Sales and Rental Marketsin Transition Evidence from Rural VietnamrdquoOxford Bulletin of Economics and Sta-tistics vol 70 (February 2008) pp 67ndash101 for examples

8 These changes have been called ldquoPhase IIIrdquo of the process of land reform by Alain deJanvry Marcel Fafchamps and Elisabeth Sadoulet in ldquoPeasant Household Behaviorwith Missing Markets Some Paradoxes Explainedrdquo Economic Journal vol 101 no409 (1991) 1400ndash17

275

Definition and assignment of property rights involves surveyinglands titling them and creating a land registry so that perspective par-ticipants can examine the landrsquos history of transactions including liensand competing claims Legal reforms include determining who canparticipate in transactions means of contract enforcement removal onimplicit or explicit restrictions on rental and transfer etc Implicit re-strictions to rental for example may occur because without an adequatelegal framework squatters may possess strong claims to ownershipLand owners may be reluctant to rent to others because they fear losingclaims to ownership Weak and corrupt legal systems make it difficultto enforce property ownership rights and may slow the developmentof land markets Issues such as womenrsquos rights to own and transferlands can have efficiency and equity effects of subsequent market pro-cesses

Finally while land markets have the potential to efficiently redis-tribute lands in the presence of distortions in credit and insurancemarkets creation of land markets alone may not solve the problem ofinequitable distribution For example if banks or other creditors areunwilling to lend money in relatively small amounts due to transac-tions costs associated with such loans then the poor may not be able tofinance purchase or rental of the small amounts of land they seek Un-equal distribution of productive assets such as capital can exacerbatesuch problems because the poorest may not have collateral to support aloan Insurance markets are important because the poorest of the poormay be less willing to risk their assets as collateral

AGRICULTURAL LABOR MARKETSLabor is often the most valuable resource the rural poor possess Thislabor can be used to cultivate their own lands to process and marketproducts after harvest to produce non-agricultural goods some for ownconsumption and others to be sold in markets for child-care cookingand other household activities Alternatively this labor may be sold orrented to others both farm and non-farm employers Agricultural la-bor markets exist because land markets alone can not balance out dif-ferences in land and labor endowments Small-scale land owners orlandless individuals supply labor to large-scale landowners who needmore than their own family labor to carry out their farming operationsLabor markets help allocate resources into their most valuable uses bytransmitting signals about resource scarcity across space and time Aslabor is an important input to production and a key asset held by thepoor the conduct and performance of labor markets are especially im-portant for broad-based agricultural growth


276


Casual versus Permanent LaborLabor may be hired on a casual or temporary basis by the day or forsome other short period of time such as for the harvest or weeding pe-riod Alternatively labor may be hired on a more permanent or longer-term basis perhaps for months or years Casual labor is usually paid incash and in kind (for example food many day labor wages include ameal for the worker) Laborers may be paid daily or on a piece-ratebasis for certain tasks Women are often paid less than men even forthe same task Casual labor is characterized by strong seasonality work-

BOX 13-5

REFORM of CAPITALIST AGRICULTURE in COLOMBIAColombia presents an example of some of the pitfalls associated with landreforms in many countries In the 1930s there was a public outcry mostlyby urban consumers who desired cheaper foods over the lack of produc-tivity on the large landholdings of the rural elite In 1936 Law 200 waspassed that said that potentially productive but poorly cultivated or aban-doned large holdings were to be expropriated by the government Thisthreat caused land productivity to rise for a short time and virtually no landwas confiscated During the 1950s there was a long period of civil conflictknown as ldquoLa Violenciardquo that hastened the destruction of traditional socialrelations and weakened the political powers of the old agrarian oligarchy

Following a peace pact a new phase of land reform began Law 135of 1961 set forth an ambitious reform package that included full compen-sation to existing landholders The gradualist approach doomed the pack-age from the start Political pressure from landed groups allied with urbanconsumer interests successfully diverted inputs often with substantial sub-sidies to large-scale farms Land values on favored farms increased dra-matically making compensation financially impossible By 1972 only 15percent of all land in large farms had been redistributed

Law 4 in 1973 declared an end to this redistributive reform and re-turned the country to the principles of Law 200 At the same time a politicalcoalition between large-scale farmers a small but substantial family-farmsector and urban consumers formed and created pressure for a rural de-velopment program that favored the first two groups Landless and mar-ginal farmers were politically and economically excluded

The conditions for a successful land reform never really existed inColombia Shifting alliances between urban and rural power groups dimin-ished the political will A lack of clear conviction for redistribution com-bined with the slow pace of reform further inhibited the efforts Policiesfavoring large farms largely intended to diffuse political opposition hadthe effect of destroying any prospects for real reform

277


ers tend to be hired during planting and harvest when agriculturallabor demands are highest Longer-term labor may have supervisoryresponsibilities or perform tasks that require special care such as ap-plying farm chemicals Formal or informal contracts may be developedto handle seasonal fluctuations and risks associated with agriculturalproduction

Transactions Costs Asset Inequality and Labor MarketsLabor markets in developing countries often contain imperfections dueto power imbalances imperfect information and transactions costsPower imbalances emerge when a single or small number of employersexist in an area In such cases the employers may exercise monopsony(single buyer) power over their employees and use fewer workers atlower wages than would exist in a competitive labor market Large-scale plantations such as those existing in Central America and in co-coa-producing areas in West Africa may exhibit such power Imper-fect information and transactions costs also constitute major sources oflabor market imperfections Labor must be hired with correspondingcosts of search and contracting and supervised Supervision involvescosts of monitoring and enforcement Such costs may distort incentivesfor hiring and use of different types of labor

Given information imperfections employers may be unaware ofthe reliability of workers some of whom shirk their duties As a resultcostly supervision or other contractual mechanisms must be undertakento ensure the worker performs his or her duties as expected Share crop-ping and piece-work contracts are two such mechanisms commonlyfound in less-developed countries One study of the effectiveness ofsuch contractual arrangements conducted in the Philippines found thatpiece-rate and shared cultivation were associated with significantlyhigher worker effort than time-wage contracts9 Contracts that tie to-gether labor land use agreements credit and other inputs together of-ten represent responses to imperfect information transactions costs andrisk sharing

Wages in agriculture whether on a casual or a full-time basis arerelatively low Throughout the developing world people who rely onagricultural employment as their main source of income tend to be poorPoverty rates are high among tobacco-estate workers in Zimbabwe andMalawi day laborers on the Indian sub-continent and among coffee

9 See A Foster and M Rosenzweig ldquoA Test for Moral Hazard in the Labor MarketContractual Arrangements Effort and Health Review of Economics and Statisticsvol 76 (1994) 213ndash27

278


and other plantation workers in Central America Government inter-ventions into labor markets are often justified based on this observedpoverty Minimum-wage legislation for farm workers has been tried ina number of countries including Zimbabwe South Africa and severalCentral American countries Minimum wages for farm workers tend tobe difficult to enforce also because of high transactions and enforce-ment costs and imperfect information endemic in rural areas of lessdeveloped countries Other interventions include establishment of la-bor enforcement standards provision of labor market information in-vestments in education and schooling to increase worker productivityand promotion of non-agricultural job opportunities that compete withagricultural employment As noted in Chapter 7 non-farm employmentconstitutes a large and growing share of the rural labor markets Asagriculture develops over time it must compete with alternative em-ployment opportunities in rural labor markets

SUMMARYLand tenure refers to the rights and patterns of control over the landresource Land rights determine social and political status as well asthe economic power of a large proportion of the population in develop-ing countries A land reform is an attempt to change the land tenuresystem through public policies Land tenure systems vary in farm sizeand organization affect incentives to produce and invest and influ-ence the distribution of benefits from agricultural growth Family farmscorporate farms state farms and group farms are major types of farmownership Many types of tenancy or leasing arrangements also exist

The post-feudal order has resulted in some large capitalist farmsand a coexisting small farm sector in many countries No form of landtenure is universally efficient Land tenure reform is difficult to achievebecause those holding the land rights have political power Land ten-ure reform including more secure rights over land is needed for im-proved economic efficiency equity and political and economic stabil-ity Unless there is evidence that incentives have been created for farm-ers to undertake hard work and increase their capital investment andunless poverty has been reduced and social status improved for therural poor a successful land tenure reform has not occurred Changesin land tenure and more secure property rights should be accompaniedby credit marketing and other services and new land owners shouldbe taxed to support development Market-based land redistributionefforts include fortification of sales and rental markets encouragingcooperatives to redistribute lands to their members reduced govern-ment ownership and creation of land banks

279

Labor is often the most valuable resource the rural poor possessLabor markets in developing countries often contain imperfections dueto power imbalances imperfect information and transactions costsGovernment interventions into labor markets are often justified basedon this observed poverty

IMPORTANT TERMS and CONCEPTSCapitalistic agriculture Permanent laborCasual labor Political stabilizationCompensation Property rightsCorporate farms Public capital formationEntrepreneurial incentives Semi-feudal land tenureFamily farms Socialist agricultureGroup farms Stale farmsLand reform Successful land reformLand tenure Tenancy reformMarketable surplus Transactions costs

Looking AheadIn this chapter we considered institutional changes related to land andlabor In the next chapter we consider institutional changes related toinputs and credit policies Governments often intervene in input andcredit markets We will examine the nature and advisability of theseinterventions

QUESTIONS for DISCUSSION1 What is land tenure2 What are the major ways farms are organized3 What are the major types of tenancy arrangements4 What is land reform5 How does an anti-feudal land reform differ from land reforms

within a capitalist or socialist agrarian structure6 Why is a land reform often necessary7 Why is a land reform difficult to achieve8 Why are large land holdings in a densely populated country bad9 What are the requisites of a successful land reform10 What pressures might population growth or new technologies

place on existing land tenure arrangements11 What alternatives exist to administrative land reforms12 How can more secure land rights improve agricultural

productivity


280


13 What distinguishes casual labor from permanent labor and why doboth exist

14 Why are transactions costs a problem in labor markets

RECOMMENDED READINGSBell Clive ldquoReforming Property Rights in Land and Tenancyrdquo World Bank

Research Observer vol 5(2) (July 1990) pp 143ndash66Berry Albert and William Cline Agrarian Structure and Productivity in

Developing Countries (Baltimore Johns Hopkins University Press 1979)de Janvry Alain ldquoThe Role of Land Reforms in Economic Development

Policies and Politicsrdquo American Journal of Agricultural Economics vol 63(1981) pp 384ndash92

Deininger Klaus and Hans Binswanger ldquoThe Evolution of the WorldBankrsquos Land Policy Principles Experience and Future ChallengesrdquoWorld Bank Research Observer vol 14 no 2 (August 1999) pp 247ndash76

Deininger Klaus and Songquing Jin ldquoTenure Security and Land-RelatedInvestment Evidence from Ethiopiardquo European Economic Review vol 50(July 2006) pp 1245ndash77

Feder Gershon and Klaus Deininger ldquoLand Institutions and Land Mar-ketsrdquo World Bank Policy Research Working Paper Series 2014 1999

Ray Debraj Development Economics (Princeton Princeton University Press1998) chapters 12ndash13

Wortman Sterling and Ralph W Cummings Jr To Feed This World TheChallenge and the Strategy (Baltimore Johns Hopkins University Press1978) pp 271ndash88

281

CHAPTER 14

Input and Credit Markets

To take maximum advantage of technological advances in farmingsystems farmers must have access to recommended productioninputs at the specific times and in the quantities and qualities needed(and) access if necessary to outside sources of finance to pur-chase these inputshellip

mdash Sterling Wortman and Ralph W Cummings1

THIS CHAPTER1 Explains why it is important for farmers to have access to purchased

inputs and to credit2 Describes the nature of rural money markets and the determinants

of rural interest rates3 Discusses why governments tend to subsidize input prices and credit

and why these subsidies are generally inadvisable

IMPORTANCE of NEW INPUTSSuccessful agricultural development in most developing countries to-day requires increased output per hectare and per worker This agri-cultural intensification depends in part on the availability and financ-ing of new often manufactured inputs Fertilizers and pesticides newseeds irrigation systems mechanical power and supplemental miner-als and nutrients for animals are examples of these inputs Uptake ofthese inputs links farmers with national and international markets andexposes them to the associated risks and rewards As energy prices in-crease and demands for food grow over time the cost of productionand relative returns of different input mixes will be affected by interna-tionally determined forces Governments must address a series ofissues related to production distribution pricing financing and

1 Sterling Wortman and Ralph W Cummings Jr To Feed This World The Challenge andthe Strategy (Baltimore Johns Hopkins University Press 1978) p 343

282


regulation of inputs and to the identification and encouragement ofoptimal on-farm input usage

Role of Manufactured InputsManufactured inputs have an important role to play in agriculturaldevelopment because the potential for expanding the land resource islimited in most countries This scarcity or inelastic supply of land meansthat its price tends to increase over time both absolutely and relative tothe price of labor The induced-innovation theory described in Chapter11 indicates that farmers will seek new agricultural technologies thatwill enable them to substitute lower cost inputs for those whose scar-city and price are rising Agricultural research described in detail inChapter 12 will create the plant varieties that are responsive to theseinputs New higher-productivity inputs include new seeds fertilizerirrigation and pesticides many of which will be produced domesti-cally but their prices will be affected by international events Seedsfertilizer irrigation and pesticides tend to be highly complementaryinputs To be more productive than traditional varieties new varietiesof wheat rice corn and other food crops require more fertilizer andbetter water control than would be used under traditional practicesWater and fertilizer tend to induce lush plant growth and an environ-ment favorable to weeds and other pests thus raising the profitabilityof pesticides as well If this package of inputs is available to farmerstogether with the necessary financing and information on usage landand labor productivity can be raised The result is an increase in outputper hectare and per unit of labor applied at least in those areas wherethe new inputs are suited and adopted A description of these inputswill help better define their potential and limitations

Seed Seeds of high-yielding varieties are usually a relatively low-cost input However seed of superior varieties must be developed oridentified tested produced and multiplied monitored for quality anddistributed to farmers The government often has a role to play in thedevelopment testing quality monitoring and production of basic seedPrivate firms can be involved in the multiplication of seeds and distri-bution to farmers The exact roles of public and private bodies in a par-ticular country may change as the seed industry develops As hybridseeds continue to spread for crops such as maize rice and eggplant theimportance of the seed industry grows as farmers planting hybrids cannot save and use their seed from the previous crop if they expect tomaintain productivity One of the concerns with genetically modifiedcrops is that one or a few seed companies may own the intellectual

283

property rights associated with the new seeds and therefore may chargea significant seed premium (see Chapter 12 for further discussion) Thegovernment has a role to play in ensuring no undue exercise of mo-nopoly power by seed companies

Fertilizer Higher-producing varieties require additional fertilizerparticularly nitrogen phosphate and potash These nutrients can beobtained from natural fertility in the soil animal and plant wastes andleguminous plants that can fix nitrogen from the air These naturalsources often but not always must be supplemented by chemical fer-tilizers to provide the necessary quantities and precise mixtures re-quired In areas where the supply of natural fertilizers is relatively in-elastic as commercial fertilizers become less expensive and are avail-able in relatively elastic supply their use can be expected to increase

World fertilizer prices can be volatile and between 2002 and 2008they trended upward placing cost stresses on developing-country pro-ducers Upward pressures on prices are caused by world-wide demandgrowth increased costs of raw materials mdash especially natural gas whichis used to produce nitrogen the main ingredient in all nitrogen fertiliz-ers and rising transportation costs due higher energy costs Demandfor fertilizers has grown throughout the world partly due to incomeand population growth and partly the result of more corn being plantedin developed countries for use in ethanol bio-fuels Fertilizer prices mayremain high in the future as all of these factors continue to influence themarket

Water Availability of irrigation water is a major determinant ofthe number of crops grown per land area per year the inputs used andhence production Higher levels of fertilizer application require moreand better-timed water input Drainage is also important because fewcrops can tolerate excessive standing water or salinization Several im-portant factors complicate irrigation decisions Irrigation infrastructurerequires large financial investments and governments often providefunds or encourage private entities to provide funds for such endeav-ors Efficient water management requires proper pricing mechanismsprivate users of water might over- or under-use irrigation water if it isnot properly priced Proper pricing is however complicated by diffi-culty in measuring the amount of water used Water system manage-ment can have important direct effects on human health malaria andschistosomiasis are common tropical diseases whose vectors thrive instanding water Because of these considerations development andmanagement of irrigation and drainage systems often require a combi-nation of public and private initiatives Governments can seek to

CHAPTER 14 mdash INPUT AND CREDIT MARKETS

284


expand and modernize irrigation and drainage facilities They can de-sign rules of water pricing to encourage economically sound water useFarmers and villages themselves can develop smaller often well-basedsystems and the necessary canals for distribution on farms along withrules for water distribution

Efficient water use is likely to grow in importance in many areasof the world as looming water shortages result from over-use of aqui-fers damming of major river systems and from climate change whichaffects rainfall patterns and temperature-based rates of evaporationSeveral water danger zones are emerging in the developing world in-cluding the Sahel region of Africa the Horn of Africa the entire MiddleEast the Indo-Gangetic Plains in India and Pakistan and the NorthChina Plain2 In these areas growth in demand or dwindling suppliesor both is likely in the future to be associated with shortages and un-less solutions are found dwindling agricultural production Solutionsinclude better management of existing supplies and new efficiency-enhancing technologies such as drip irrigation and drought-resistantplant varieties

Pesticides Farmers often find using pesticides (insecticides forinsects fungicides for diseases and herbicides for weeds) highly prof-itable as agricultural production intensifies through increased use ofnew seeds fertilizer and water Sometimes these pesticides are appliedas a preventative treatment and other times after a major pest problemdevelops

Pesticides can have serious drawbacks however Some pesticidesare toxic to humans and animals and result in poisonings in the shortrun or chronic health problems in the longer term Applications withimproper equipment or inadequate protective clothing exacerbate healthproblems Improper storage and handling can create adverse healthconsequences Chemical pollution can spread beyond the area wherethe pesticide is applied with particularly deleterious effects on fisher-ies Some pesticides kill insects that are beneficial to agriculture Oftenwhen pesticides are applied over a period of time the target insectsdiseases or weeds develop resistance making increased pesticideamounts necessary to maintain the same level of effectiveness

Pesticides despite these problems will likely be needed for sometime until new pest-resistant varieties biological and cultural practicesand other substitute methods for pest control can be further developed

2 See Jeffrey D Sachs Common Wealth Economics for a Crowded Planet (New York Pen-guin Books 2008) pp 121ndash37

285

Several of these methods called integrated pest management or IPMhave already been developed and implemented for certain pests on cer-tain crops in certain locations (see Box 14-1) Much additional researchis needed however to make these practices more widely available indeveloping countries Weed control is especially important to intensi-fied production in Africa where labor for weeding is less abundant thanin other regions

Animal Inputs As discussed in Chapter 7 livestock play an im-portant role in farming systems in developing countries Animal pro-ductivity is often low and new inputs related to disease control supple-mentary minerals and other feed supplements improved shelter andin some cases better breeds can make a difference Inputs for control-ling diseases and parasites are perhaps the most important the sig-nificance of feed supplements shelter and new breeds varies from

BOX 14-1

INTEGRATED PEST MANAGEMENT in ECUADORrsquoS HIGHLANDSPotato producers in the Ecuadorian highlands face a number of importantpests including Late Blight Andean Weevil and the Central American Tu-ber Moth Late Blight is controlled through heavy applications of fungicideswhile the latter two pests are controlled by spraying Carbofuran a highlytoxic pesticide Farmers combine pesticides into a mixed ldquococktailrdquo con-taining as many as 12 chemical agents and spray their fields with up toeight applications in a single season These cocktails are mixed withoutknowledge of interactions between active ingredients or of potential hu-man health impacts Farmers complained about the high financial costof these applications and the health costs associated with chemicalmisuse IPM techniques were developed through a USAID-sponsoredresearch project (IPM-CRSP) and included identifying and screening LateBlight-resistant varieties use of insect traps more targeted spraying of alow-toxicity alternative field sanitation and cultural techniques and the useof biological control alternatives Local farmers were invited to participatein Farmer Field Schools and field days to learn about the techniques Pes-ticide applications were reduced by half and experience on farmer fieldsshowed that the IPM package yielded more than $600 per hectare in netbenefit compared to alternative practices This example shows that IPMtechnologies can be profitable at the same time they reduce exposure toharmful chemicals

Source Alwang et al ldquoDeveloping IPM Packages in Latin Americardquo in Globaliz-

ing Integrated Pest Management A Participatory Process ed GW NortonEA Heinrichs GC Luther and ME Irwin (Ames Iowa Blackwell Publishing2005)


286


3 See Hans Binswanger ldquoAgricultural Mechanization A Comparative Historical Per-spectiverdquo World Book Research Observer vol 1 (January 1986) pp 27ndash56

country to country and by type of livestock Because indigenous live-stock have been adapted to their specific environments the transfer inof new breeds is particularly complex except perhaps for poultry

Mechanical Inputs Agricultural mechanization is frequently acontroversial subject Tilling planting cultivating and harvesting arestill done by hand in large parts of the developing world particularlyin Sub-Saharan Africa and in hilly regions on other continents In manyareas of Asia and Latin America animals are an important source ofpower Even in countries where farming is more mechanized powertillers and tractors are often restricted to tillage and a few other opera-tions3 The controversy arises because machinery usually substitutesfor labor or animals In many developing countries labor is abundantand its cost is low Alternative employment opportunities outside agri-culture are limited so that labor displacement is undesirable there-fore mechanization is most profitable in countries where land is abun-dant labor is scarce and capital is cheap this situation would seem toexist in relatively few countries

Does this mean that there is little role for agricultural mechaniza-tion Not necessarily but the types of mechanization should be differ-ent from what is observed in most western developed countries Highlyproductive cropping systems whether on small or large farms can ben-efit from more precise planting depths and fertilizer placement me-chanically pumped irrigation water mechanical threshing (but usuallynot harvesting unless labor is scarce) transport power spraying of pes-ticides and tilling when timing is critical for multiple cropping Manyof these mechanical devices however may be hand-held (eg spray-ers) or stationary (eg pumps and threshers) Even in areas where la-bor is usually abundant shortages can occur in certain seasons whichif relieved through mechanization could increase the overall demandfor labor

Individual farmers will consider the private profitability whendeciding whether to invest in a machine If very large farms exist incountries with surplus labor in agriculture operators of these farmsmay prefer labor-saving machinery because it allows them to deal withfewer employees and given the transactions costs and capital subsi-dies that may exist it may be more privately profitable to follow large-scale mechanization even if society as a whole would be better offwithout it Such behavior is one of the reasons that land reform is soimportant to many developing countries (see Chapter 13)

287

Governments and foreign assistance agencies must be careful notto encourage non-optimal mechanization (from societyrsquos viewpoint)through ill-advised subsidies or other means Mechanization is inevi-table over time but the type of mechanization should be appropriategiven the relative endowments of land labor and capital Certain gov-ernment policies such as those influencing exchange rates indirectlyaffect the prices of capital-intensive inputs such as machinery Impactson relative prices of inputs should be considered during policy formu-lation

Input MarketsDeveloping countries often subsidize the purchase of seeds fertilizersirrigation water pesticides and occasionally mechanical inputs Is thisa good idea Generally speaking it is not Such subsidies can lead tolosses in economic efficiency for the country as a whole can be costly tothe government can discourage private-sector competition in the pro-vision of these inputs and particularly in the case of pesticides maylead to environmental damages from over-application

Governments frequently become involved in multiplying and sell-ing improved seeds to farmers at or below cost In some cases scarceresearch resources are diverted to multiplying seeds rather than devel-oping new varieties In other cases research systems are forced to focuson selling seeds to pay for operating costs for the system As a resultprivate firms unable to compete with the government treasury do nottake on the function of multiplying and selling seeds Without devel-opment of these private firms the government must continue to be re-sponsible for this function

Fertilizer subsidies can be used in selected situations in which gov-ernments desire to increase the adoption of new inputs by groups offarmers that might not otherwise adopt them Unfortunately in manycountries these subsidies are necessitated by the artificially low pricesimposed on agricultural outputs for the purpose of keeping food pricesdown for urban consumers Input subsidies help compensate farmersfor income losses from these policies While this combination of poli-cies can have the desired effect at least in the short run high costs tothe government and potential fiscal problems result in the long runmaking the policies non-sustainable Also the economic efficiency lossesassociated with these policies can be substantial Finally studies showthat from the farmerrsquos perspective access to inputs can be more impor-tant than their prices Subsidy policies and government involvement ininput markets often lead to shortages of inputs and their rationing whichare harmful to long-run growth


288


BOX 142

MODERN INPUTS and ECONOMIC GROWTHNew technologies and inputs help achieve increases in agricultural outputand income in rural areas of developing countries This income is spent bythe households on goods and services some of which are produced lo-cally and others which are imported into the region These expendituresinduce income growth in the non-farm economy the so-called multiplier

effects By far the largest portion of these multipliers is caused by house-hold expenditures on consumer goods and services though the effectsresulting from increased use of farm inputs and in processing marketingand transportation of farm output are substantial contributors to regionalgrowth

Linkages between farms and suppliers of inputs also create spilloversinto the local economy Though seeds agrichemicals irrigation suppliesand farm machinery usually are not produced in agricultural regions inputsupply services including technical advice machinery repair and a largeproportion of irrigation construction and maintenance can be produced lo-cally These activities create opportunities for non-farm employment andincome that is in turn spent locally The creation and deepening of back-ward linkages from agriculture are important contributions to rural eco-nomic development

Efficiency losses are also a problem for water and pesticide subsi-dies The latter can create excessive use of toxic chemicals and can re-sult in all the deleterious effects described earlier In summary inputsubsidies are generally inadvisable The government can play a moreconstructive role by ensuring the availability of these inputs (includingthe improvement of rural roads) publishing price information to en-courage competition setting quality standards for seeds and fertilizersrequiring and enforcing labeling of input containers and regulatinguse of toxic pesticides and transgenic seeds

Role of CreditAccess to credit becomes important as a developing country moves fromtraditional to more modern agriculture Credit helps farmers purchaseinputs such as seeds fertilizers and chemicals It facilitates purchase ofdurable productive inputs such as machinery and helps householdsbetter manage their resources Credit can be used for input purchasesinvestment marketing and consumption Without credit even high-return investments long- or short-term would be infeasible for manyfarmers Loans enable farmers to better manage risks since they canborrow during bad years and pay back the loans during good years

289

Even within cropping seasons short-term credit is used to smooth con-sumption and provide cash at times of acute needs

Without widespread access to credit inputs associated with im-proved technologies can be purchased only by wealthier farmers Capitalformation and improvements on smaller farms can be hampered Fewerfarmers are able to purchase or even rent land In cases where producemarketing requires cash outlays lack of credit can disrupt marketingactivities Well-functioning rural financial institutions are essential toimproving economic efficiency reducing income risk and meeting in-come distribution goals

NATURE of RURAL MONEY-MARKETS and DETERMINANTS

of RURAL INTEREST RATESFinance in rural areas consists of three components credit (borrowingand lending) saving and insurance These components frequently over-lap as savings can be used for capital purchases (and hence substitutefor credit) or as a safety net or insurance substitute Developing-coun-try households use complex strategies to increase their productive ca-pacity share risk and manage purchases of food and other goods overtime Access to finance helps determine the suitability of such strate-gies Better understanding of rural financial markets requires consider-ation of the three components and efforts to strengthen one compo-nent may be compromised by weaknesses in others4

Credit facilitates the temporary transfer of purchasing power fromone individual or organization to another However many types of lend-ers or money-markets exist and credit institutions may or may not ad-equately serve the needs of a developing agriculture Credit is oftenviewed as an oppressive or exploitive device in developing countriesWe need to examine both the types of lending sources found in devel-oping countries and the evidence of exploitive behavior associated withthese money-markets

Types of Money-MarketsRural money-markets consist of two broadly defined lending sourcesorganized (or formal) and informal Private commercial banks govern-ment-controlled banks cooperative banks and credit societies are calledorganized credit sources Public or private these lending sourcesusually are regulated by the government and are open to audit and

4 See Manfred Zeller and Richard L Meyer The Critical Triangle of Microfinance fromVision to Reality (Baltimore Johns Hopkins University Press 2003) for more details


290


inspection In addition to credit they may provide other financial ser-vices such as savings and certain forms of insurance In general formalmoney markets have historically not served well the needs of small-and medium-scale farmers in developing countries As a result overtime many developing-country governments have intervened to pro-mote better access to formal financial services primarily credit Theseprograms were largely unsuccessful for many reasons one of whichwas that they did not recognize alternative informal credit sources thatare found throughout the developing world

Informal or unorganized credit sources include moneylendersmerchants pawnbrokers landlords friends and relatives Some creditsources mdash eg landlords and merchants mdash combine other economicactivities with lending Except for absentee landlords the relationshipbetween borrower and informal lender is generally marked by personalcontact simple accounting and low administrative costs

Informal lenders are important sources of funds in many rural ar-eas These lenders usually know the borrowers personally require littlecollateral make consumption as well as production loans are acces-sible at all times and usually are flexible in rescheduling loans How-ever these informal lenders also tend to charge high rates of interestand are frequently accused of exploitive activities In cases where lend-ers are landlords merchants or both they have been accused of usingtheir position to tie borrowers to themselves by forcing their clients torent from borrow from buy from and sell to them Thus these agentsare said to extract monopoly profits from their clients Are borrowersconsistently being exploited It is important to examine this questionbecause it has important implications for the role of more formal pri-vate and public credit institutions

Do Informal Money-Markets Exploit BorrowersThe issue of borrower exploitation revolves around the existence ofusury or monopoly profits earned by the lenders Hence we need toconsider the factors that determine the interest rates charged by theselenders The major components of rates of interest on loans are (1) ad-ministrative costs (2) the opportunity cost of lending (3) a risk pre-mium due to the probability of default in repayment and (4) monopolyprofit

Administrative costs should not be too high for moneylendersgiven simple contracting procedures and personal knowledge of cli-ents Many loans with small amounts of money per loan increase ad-ministrative costs but these costs are probably not excessive Opportu-nity costs of lending are low in rural areas because interest rates offered

291

by organized money markets tend to be low Therefore the critical fac-tor in determining whether interest rates are generating monopoly prof-its in the informal money market is the risk premium or the probabilityof default The risk premium for loans to small-scale particularly ten-ant farmers can be high These farmers are close to the margin of sub-sistence and a streak of bad weather or a serious illness can spell disas-ter Without formal collateral the risk of default grows Because weathertends to affect all farmers in a given area a spell of bad weather createspotential for simultaneous default of many borrowers Therefore onewould expect relatively high interest rates just to cover the risk factorExploitive situations do exist in which moneylenders extract monopo-list gains However careful empirical studies seem to indicate thatmonopoly profits may not be as prevalent or large in informal creditmarkets as is often believed5 The reason is competition The amountsof the loans are often small and start-up costs required to become amoneylender are low This ease of entry serves to keep interest rates atan appropriate level given the level of risk administrative costs andthe opportunity cost of capital If profit margins become large incen-tives are created for new moneylenders to enter the business and com-pete away those profits

High risks associated with loans to subsistence farmers howevermean that lenders have incentives to maintain tight control over bor-rowers Moneylenders who are also landlords or merchants have meansof tying their clients to themselves through leases consumer credit andso forth Other moneylenders may be hesitant to lend to someone whoalready owes substantial sums or who has defaulted to another In sum-mary it appears that some exploitation by moneylenders does occurparticularly if the moneylenders control the land or the market How-ever the magnitude of this exploitation may not be as great as is oftenbelieved Evidence of high interest rates on rural loans is alone not suf-ficient to conclude that moneylenders are exploitive since there arehigh costs associated with making these loans Informal sources of creditserve a vital function in most developing countries because withoutthem most small farmers would not have access to credit

Organized Money-Markets and Transactions CostsWhy are small farmers in developing countries not better served byorganized money-markets Both private and public financial institutions

5 See for example P Bardham and A Rudra ldquoInterlinkage of Hand Labor and Capi-tal Relations An Analysis of Village Survey Data in East Asiardquo Economic and Politi-cal Weekly (1978) pp 367ndash84


292


find that transactions costs are high Loans savings and insurance needsare small and the paperwork and time spent evaluating potential cli-ents collecting payments and supervising loans in order to reduce risksof default are costly In many cases the government regulates the maxi-mum interest allowed and that rate will fail to cover the administra-tive costs and risk Thus where private and public sources of financeexist they tend to deal with larger-scale farmers to reduce administra-tive costs and the chances of default (see Box 14-3)

The magnitude of these transactions costs is illustrated by a rela-tively successful bank that has provided credit for many years to therural poor in Bangladesh The Grameen Bank of Bangladesh targetshouseholds that own less than 05 acres of cultivable land6 The bankorganizes its clients into groups and associations provides credit with-out collateral and supervises utilization of the loans A maximumamount (the equivalent of about $150) is lent to individuals within agroup of five members Nearly three-fourths of the borrowers arewomen Peer pressure together with close supervision ensures repay-ment rates of more than 90 percent The interest rate charged is roughly16 percent a year and the default rate has historically been less than 2percent The bank is subsidized however by the State Bank ofBangladesh and by the International Fund for Agricultural Develop-ment (IFAD) The interest on the loans would be around 5 to 10 percenthigher than it is if the bank had to break even to borrow at the samerate as the other financial institutions in the country7 Because the de-fault rate and the opportunity cost of capital are low it is clear thatmost of the interest charged is to cover administrative cost The bankcould lower this cost with less supervision but the default rate wouldlikely rise and offset the cost saving

The Grameen Bank also lends very little money for activities asso-ciated with crop production In general this type of microcredit lendingserves mostly for livestock and poultry for small-scale processing andmanufacturing and for trading and shop keeping These activities areless risky than crop production The Grameen Bank model has beenimproved upon through sequential experimentation and micro-finance

6 See Mahabub Hossain ldquoCredit for Alleviation of Rural Poverty The Grameen Bankof Bangladeshrdquo International Food Policy Research Institute Research Report No65 (Washington DC February 1988) for an excellent discussion of the GrameenBank see also Mark M Pitt and Shahidur Khandker ldquoThe Impact of Group-basedCredit Programs on Poor Households in Bangladesh Does the Gender of Partici-pants Matterrdquo Journal of Political Economy (1998) pp 958ndash96 for information onthe impacts of such programs

7 Hossain ldquoCredit for the Alleviation of Rural Povertyrdquo p 11

293

organizations around the world are now flourishing without subsidi-zation These organizations and some of their organizing principles arediscussed below

One can see that small agricultural loans are costly and as a re-sult most commercial lenders lend to larger farmers where the risk andadministrative costs are lower Government-supported credit programsoften have subsidized interest rates in developing countries but theserates tend to encourage loans to large farmers (many micro-finance in-stitutions are an exception)

Transactions costs for private or public loan transactions can alsobe high because of fraud favoritism or embezzlement of funds fromwithin the system This situation arises most frequently when loansare subsidized creating excess demand for credit and incentives forbribery

GOVERNMENT-ASSISTED CREDIT PROGRAMSMany governments use credit programs as part of their developmentprogram and many international donors support these programs Gov-ernment-supported credit is based on the notions that (1) credit is criti-cal to the adoption of new technologies (2) moneylenders exploit farm-ers and public credit can provide them with competition (3) credit canbe combined with supervision and education to increase the capacityof farmers to use modern inputs (4) subsidized credit can offset disin-centives to production created by other policies that discriminate againstagriculture and (5) government-supported credit programs can lesseninequities in the rural sector8

Subsidized credit provides an easy vehicle for transferring publicfunds to the rural sector Examples of subsidized credit programs

BOX 14-3

ADMINISTRATIVE COSTS and LOAN SIZEThe cost of lending to farmers includes relatively large fixed costs to payfor administration and bookkeeping To cover these costs interest ratesmust be higher for smaller loans even if all borrowers have equal risk ofdefault For example if the variable cost of capital is 10 percent but thebank incurs a fixed cost of $10 to administer each loan for the bank tobreak even on each loan it must charge a total of 20 percent interest tothose who want to borrow $100 for repayment after one year In contrastthose who want to borrow $1000 would have to pay only 11 percent


8See Yujiro Hayami and Vernon Ruttan Agricultural Development An International Per-spective (Baltimore Johns Hopkins University Press 1985) pp 398ndash403

294


Bangladesh families have benefited from Grameen Bank loans

abound in every region of the developing world Dale Adams points toa number of studies of such programs in Honduras Sudan Jamaicaand elsewhere that demonstrate how ill-advised subsidized credit isfrom a development perspective9 Adams finds that while evaluationsof subsidized credit programs often find favorable impacts on individualborrowers a broader examination of the net effects of these programsusually finds few positive effects on economic development They alsocan compromise the viability of the rural financial system

Effects of Subsidized CreditSubsidized credit creates excess demand for credit by lowering interestrates In many cases because interest rates are negative after control-ling for inflation the demand for credit is infinite Subsidized crediterodes the capital available in financial markets and undermines ruralfinancial institutions Private banks cannot cover expenses (adminis-trative costs defaults etc) at low interest rates yet they are forced tolower interest rates in order to remain competitive with public creditsources even if not required to lower them by law Thus the survival

9 See Dale W Adams ldquoThe Conundrum of Successful Credit Projects in FlounderingRural Financial Marketsrdquo Economic Development and Cultural Change vol 36 (Janu-ary 1988) pp 355ndash67

295

of these private institutions is threatened If they fail additional gov-ernment involvement and additional budget outlays will be neededAn equally important effect of subsidized loan rates is that they lowerall interest rates and hence discourage private savings If agriculturaldevelopment is to be able to generate capital then viable rural financialinstitutions are needed to both provide loans and mobilize savings

Because subsidized credit generates excess demand for loans creditis rationed and almost inevitably goes to the larger farms for which theadministrative costs are lower The phenomenon of successful impactsof subsidized credit on individual borrowers yet negligible effects onoverall development exists because rationed credit means that fewpeople are touched by the programs Seldom is more than 5 percent ofthe potential credit recipients reached Because the subsidized loansare valuable the credit system can become politicized as large land-owners offer favors to bank managers to obtain loans or financially sup-port politicians to encourage continuation of the program In additionto these distributive effects default rates on subsidized loans tend to behigh Public sector lenders may be less familiar with the borrowers thanare the lenders in the private sector Because there are pressures to lendto larger borrowers the productive potential of the loan may not beconsidered leading to high default tales

Innovations in Rural FinanceSince the early 1970s a gradual revolution in lending to the poor hasbeen occurring in a number of developing countries As countries learnfrom their failures with subsidized credit programs and as experiencegrows with targeted small group-loan programs such as the GrameenBank in Bangladesh the large-scale provision of small loans to low-income people has expanded As of 2001 more than 1500 micro-financeinstitutions (MFIs) with 54 million members existed in 85 developingcountries10 The Grameen Bank however while demonstrating that poorpeople can be good credit risks given a credit program structured withproper incentives has remained somewhat constrained by its inabilityto operate entirely without subsidy Since the late 1980s the povertylending approach of banks such as the Grameen Bank has been chal-lenged by a more commercially-oriented f inancial systemsmicrofinance approach11 While both approaches focus on the poor

10 Cecile Lapenu and Manfred Zeller Distribution Growth and Performance ofMicrofinance Institutions in Africa Asia and Latin America IFPRI FCND Discus-sion Paper 114 (Washington DC2001) p 111

11 See Marguerite S Robinson The Micro Finance Revolution Sustainable Finance for thePoor (Washington DC The World Bank 2001) p 7


296


the latter emphasizes savings services to the poor as well as loans12 Afinancial systems approach enables banks to generate sufficient re-sources to not only be sustainable but to provide opportunity for theeconomically active poor (as opposed to the extremely poor) to saveand invest at a decent return during times when they are able to saveExamples of such micro-credit banking systems that have proven prof-itable are found in countries as diverse as Bolivia and Indonesia Mi-cro-financial institutions are also experimenting in offering the thirdcomponent of the finance trinity micro-insurance Micro-finance insti-tutions have incentives to help their clients manage risks since a pooroutcome may lead to default on loans

These new experiences in providing finance to small-scale and poorfarmers have been built on a number of principles The first principle isrecognition that credit savings and insurance are interlinked and ef-forts to provide one component should consider impacts on the othersSecond funds are fungible and can be used for things other than inputpurchases such as consumption and other emergency needs By betterenabling risk management access to financial services can improve in-come generation over time A third principle is that for sustainabilitycredit providers should charge what the loans cost which is usuallymore than is charged to large commercial borrowers because of the trans-actions costs on many small loans Some of those costs arise from thenecessity of screening credit applicants The key innovation ofmicrofinance is the use of joint group liability loans are made to groupsand if one member of the group defaults the entire loan is consideredto be in default sing group liability groups use local knowledge toscreen members and moral suasion to enforce repayment These fac-tors reduce transactions costs and improve loan repayment rates Com-mercially-oriented micro-finance provides formal competition for in-formal money lenders and hence is most likely to succeed in preciselythose areas where moneylender profits are excessive due to local mo-nopoly power

Lessons for Credit PoliciesSeveral lessons emerge from the applied research on rural credit Firstadoption of new technologies often requires purchase of modern in-puts Consequently credit availability has been found to be more im-portant to development than the interest rate charged and there is a

12 Lapenu and Zeller Distribution Growth and Performance of Microfinance Institu-tions in Africa Asia and Latin America note that of the 54 million members ofMFIs world wide 44 million are savers and 23 million are borrowers

297

tradeoff between credit availability and subsidized interest rates Sec-ond the viability of rural financial institutions is jeopardized by subsi-dized credit This weakening of rural financial markets can constrictboth the supply of and demand for credit The rural poor are penalizedon their deposits as well as their loans13 Third credit is fungible inother words it may not be used for its intended purpose Itrsquos easy forsubsidized production credit to be used for consumption items or non-productive assets This fungibility is not necessarily bad unless it raisesthe default rate but should at least be understood by policymakersFourth a key to reducing market interest rates is to reduce agriculturalrisk (and hence defaults) and the transactions costs associated with lend-ing and borrowing Higher income levels associated with economic de-velopment may help reduce the risk of defaults as may certain cropinsurance and other government policies discussed in Chapter 15 Im-proved roads and other means of communication and in some casesgroup borrowing and guarantee of loans can help reduce transactionscosts

Because administrative costs per dollar lent to small farms arehigher than to large farms banks either must charge higher interestrates (or other hidden charges) to small farms than large or give loansmainly to large farms Thus many countries need to pursue policies tomake land more widely available to the poor or the credit system willalso work against the poorest farmers

SUMMARYSuccessful agricultural development requires increased output per hect-are and per worker This agricultural intensification depends on theavailability of new often manufactured inputs Seed fertilizer pesti-cides irrigation mechanical power and supplementary minerals andfeeds are examples of these inputs Manufactured inputs can substitutefor inelastic supplies of land to increase production at a lower per-unitcost A variety of issues must be resolved by each country howeverwith respect to externalities associated with certain inputs such as pes-ticides the appropriate types of mechanization and the role of the gov-ernment in producing distributing and financing inputs Governmentsoften subsidize inputs These subsidies can discourage private compe-tition for input supply can be costly to the government and may en-courage overuse of inputs such as pesticides that create externalities

13 See Adams ldquoThe Conundrum of Successful Credit Projects in Floundering RuralFinancial Marketsrdquo p 366


298


Credit is essential as a country moves from traditional to modernagriculture Credit from informal sources such as moneylenders isoften viewed as oppressive However risks and administrative costs ofloans to small farms are high and given the typical competition amongmoneylenders monopoly profits may not be as prevalent or as high asoften portrayed When moneylenders are also landlords or merchantsthe chances of exploitation are greater Formal private and public lend-ers do not serve a high proportion of the farmers because risks andtransactions costs are high Because governments frequently subsidizeinterest rates rationed credit tends to go to the larger farms The subsi-dies erode the capital in the financial system and thus the number offarms served Low interest rates also discourage deposits and reducethe ability of formal private banks to compete Credit savings and in-surance are interlinked and efforts to provide one component shouldconsider impacts on the others

IMPORTANT TERMS and CONCEPTSAdministrative costs MicrofinanceExploitation MoneylendersFertilizers and pesticides Money-marketsFungibility Monopoly powerGrameen Bank New seedsGroup lending Opportunity costs of lendingInformal credit sources Organized credit sourcesInput subsidies Purchased inputsIntegrated pest management Risk of defaultIrrigation systems Subsidized creditMechanical power

Looking AheadGovernments often intervene in agricultural markets to influence pricesIn the next chapter we examine why governments intervene and theeffects of those interventions Efficient marketing systems are essentialfor agricultural development and we consider the role that govern-ments can play in improving the marketing system

QUESTIONS for DISCUSSION1 Why are manufactured agricultural inputs usually necessary for

agricultural development2 What are some of the key manufactured inputs needed3 In what manner are agricultural inputs complementary in nature

299

4 What are the advantages and disadvantages of pesticides5 Why is mechanization a controversial issue6 Why do governments subsidize the purchase of manufactured

inputs7 Why is agricultural credit important to agricultural development8 How do organized and informal sources of credit differ9 Why might bankers be biased against small farmer loans in devel-

oping countries10 What factors would you examine if you were trying to assess

whether interest rates charged in informal money-markets wereexploiting borrowers

11 What are subsidized interest rates Are they a good idea forgetting agriculture moving

12 What might be one problem associated with the fact that credit isfungible

13 Why do governments support credit programs14 How might transactions costs associated with rural financial

markets be reduced

RECOMMENDED READINGSAdams Dale W ldquoThe Conundrum of Successful Credit Projects in Floun-

dering Rural Financial Marketsrdquo Economic Development and CulturalChange vol 36 (January 1988) pp 355ndash67

Adams Dale W Douglas H Graham and J D Von Pischke eds Under-mining Rural Development with Cheap Credit (Boulder Colo WestviewPress 1984)

Binswanger Hans ldquoAgricultural Mechanization A Comparative Histori-cal Analysisrdquo World Bank Research Observer vol 1 (January 1986) pp27ndash56

Bouman F J A and R Houtman ldquoPawnbrokering as an Instrument ofRural Banking in the Third Worldrdquo Economic Development and CulturalChange vol 37 (October 1988) pp 69ndash99

Hayami Yujiro and Vernon W Ruttan Agricultural Development An Inter-national Perspective (Baltimore Johns Hopkins University Press 1985)pp 398ndash403

Hossain Mahabub ldquoCredit for Alleviation of Rural Poverty The GrameenBank in Bangladeshrdquo International Food Policy Research Institute Re-search Report No 65 Washington DC February 1988

Pingali Prabhu Yves Bigot and Hans P Binswanger Agricultural Mecha-nization and the Evolution of Farming Systems in Sub-Saharan Africa (Balti-more Johns Hopkins University Press 1987)

Robinson Marguerite The Micro Finance Revolution Sustainable Finance forthe Poor (Washington DC The World Bank 2001)


300

Sachs Jeffrey D Common Wealth Economics for a Crowded Planet (New YorkPenguin Books 2008)

Von Pischke J D Dale W Adams and Gordon Donald Rural FinancialMarkets in Developing Countries Their Use and Abuse (Baltimore JohnsHopkins University Press 1983)

Yaron Jacob ldquoWhat Makes Rural Financial Institutions Successfulrdquo WorldBank Research Observer vol 9 (1 1994) pp 49ndash70

Zeller Manfred and Richard L Meyer The Critical Triangle of Microfinancefrom Vision to Reality (Baltimore Johns Hopkins University Press 2003)


301

CHAPTER 15

Pricing Policies and Marketing

Systems

The links between price polices and food marketing take the foodpolicy analyst to the very core of an economy and the most basicissues concerning the consequences of market organization foreconomic efficiency and income distribution mdash C Peter Timmer

THIS CHAPTER1 Discusses the nature of markets how and why governments tend

to intervene in agricultural markets to affect prices and the resultsof those interventions

2 Explains the importance of efficient marketing systems and de-scribes how marketing systems have changed over time in develop-ing countries

3 Considers the role that government can play in providing market-ing infrastructure market information marketing services andregulations

PRICING POLICIESFood and agricultural prices are major determinants of producer incen-tives and real incomes in developing countries These prices are influ-enced by government policies and by the efficiency of marketing sys-tems Pricing policies and marketing systems have changed signifi-cantly over the past thirty years especially in response to domesticbudgetary and global market pressures The roles of government pro-cessors wholesalers and retailers are changing Governments in some

1 C Peter Timmer ldquoThe Relationship Between Price Policy and Food Marketingrdquo inFood Policy Integrating Supply Distribution and Consumption ed J Price GittingerJoanne Leslie and Caroline Hoisington (Baltimore Johns Hopkins University Press1987) p 293

302


developing countries continue to adopt pricing policies that reduce foodprices for urban consumers even if farmers are forced to bear the costsIn other developing countries increased integration into global mar-kets has resulted in freeing up of prices and in new approaches to pro-cessing marketing and regulating farm commodities and productsIronically in many developed countries where farmers are a muchsmaller proportion of the population government price interventionscontinue to support agricultural prices often at the expense of taxpay-ers and consumers and in some cases with deleterious effects on devel-oping countries Why do we observe these policies How are they imple-mented and what are their short- and long-run effects These ques-tions are addressed below followed in the next section by a discussionof the roles of agricultural marketing systems and how those systemshave changed over time

Reasons for Price InterventionGovernments intervene into agricultural price formation for two majorreasons to change the outcomes in agricultural markets themselvesand to raise revenue to pay for roads police and other public servicesThese interventions have a large influence on the welfare of both farm-ers and non-farmers Sometimes government policies reflect the long-run interest of society as a whole helping to stabilize and raise incomefor many people but often they reflect more narrow or short-run politi-cal objectives

The long-run interest of most societies calls for policies that (1)contribute to economic growth (2) improve income distribution or atleast meet minimum nutritional needs of citizens and (3) provide acertain measure of food security or stability for the country over timeGovernments vary widely in what they actually do and their choice ofpolicies helps explain the wide differences in economic outcomes acrosscountries and over time The choice of policy is much influenced byhow governments respond to key interest groups Urban consumerswant lower food prices particularly the poor who spend a large frac-tion of their income on food Employers also prefer low food priceswhich allow them to pay lower money wages But low food prices hurtagricultural producers and reduce investment in agriculture whichlowers farm productivity over time

In most developing countries the balance of political power fa-vors urban consumers and employers Although farmers are in themajority they are usually poorer are often illiterate and are geographi-cally dispersed across the countryside Thus political power with re-spect to food prices is centered in urban-industrial areas

303

As development proceeds and incomes grow several factors maycause the balance of political power within countries to shift towardshelping farmers if necessary at the expense of consumers First foodprices become less important in household budgets because the pro-portion of income spent on food declines with higher incomes Secondthe declining relative size of the agricultural sector makes it less costlyfor the government to succumb to pressures from farmers while at thesame time the reduced number and increased specialization of farmsimproves the ability of farmers to organize for collective action Thirdgovernments in richer countries have easier access to other sources oftax revenue outside the farm sector

The form of government interventions into agricultural commod-ity markets also shifts as development proceeds In the poorest coun-tries interventions often focus on international trade because that iseasiest to control Governments typically tax both imports and exportsand since poor countries often export farm goods and import manufac-tures the result is a tax on farmers and protection for local industriesIn somewhat higher-income developing countries governments oftenintroduce food-price subsidies and increasingly try to support farmincome as well At the highest levels of economic development per-haps the most important transition is towards increasingly well-tar-geted government programs that meet their political objectives withfewer side effects For example food price subsidies may be restrictedto benefit only the poorest consumers while farm subsidies may bemade less distorting

During early stages of development agricultural policies are of-ten highly inefficient partly because governments have limited admin-istrative capacity but also because citizens who lose from bad policymay be unable to organize against them Inefficiencies remain over timebut policies can improve as development proceeds due partly to thestructural transformation of the underlying economy but also to im-provements in political accountability

Methods of Price InterventionGovernments intervene to influence agricultural prices in several waysThey set price ceilings or floors and enforce them with commodity sub-sidies or taxes manipulation of foreign exchange rates commodity stor-age programs restrictions on quantities traded andor other policyinstruments Letrsquos examine how a few of these instruments work

Suppose the government wants to lower the price of rice an im-portant food in the diet The supply of rice must therefore be increasedin the market relative to demand Additional supplies can be created

CHAPTER 15 mdash PRICING POLICIES AND MARKETING SYSTEMS

304


by increasing imports or by stimulating domestic production In eithercase government revenues must be used to bridge the gap between theinitial price and the desired price ceiling Figure 15-1 presents an illus-tration of how the price ceiling and subsidy might work

The supply and demand schedules would intersect at price P0 and

quantity Q0 if there were no trade in rice However the country in this

example is assumed to be a rice importer so the world price of rice Pw

is below Po Initially at P

w and without government intervention quan-

tity Q1 is produced domestically Q

2 is demanded by consumers and

the difference Q2 ndash Q

1 is met by imports If the government desires to

artificially create a domestic price for rice Pd below the world price it

must pay a subsidy per unit of rice equal to the difference between theworld price and the desired domestic price (P

w ndash P

d) This subsidy could

be paid on a per-ton basis to commercial importers to cover their lossesfor importing rice at a price below what they pay on the world marketor it could be paid to a government agency that imports rice2 In eithercase the direct cost to the government of the subsidy is (P

w ndash P

d) times

Figure 15-1 Economics of a price ceiling and consumer subsidyto lower agricultural prices

2 C Peter Timmer Getting Prices Right The Scope and Limits of Agricultural Price Policy(Ithaca NY Cornell University Press 1986) p 36

305

(Q4 ndash Q

3) which equals area adeh in Figure 15-1 This kind of price ceil-

ing program is common in many African and Asian countries Con-sumers benefit but rice producers are hurt by the lower price of rice

Sometimes the government prefers not to allow scarce foreign ex-change to be spent on increased imports In this case farmers may belegally forced to sell their commodity to the government at a low priceFor example the government might force farmers to deliver Q

3 units of

rice at Pd Although nothing is imported the demand for rice (Q

4) ex-

ceeds its supply (Q3) The government must then ration rice to consum-

ers The shortage in the market provides incentives for farmers to selltheir crop illegally on the black market for a higher price Even if thegovernment allows adequate imports to meet the projected demand atthe lower price if the price of the product is higher across the borderfarmers will (usually illegally) sell in a neighboring country thus fur-ther reducing domestic supplies

One means to avoid reducing domestic production and illegal saleswhile at the same time supporting farm incomes is for the governmentto administer a two-price scheme in which producers are paid the worldprice but consumers pay only the subsidized price This type of systemis illustrated in Figure 15-1 Rather than paying adeh to importers thegovernment would pay P

wbgP

d or a subsidy of (P

w ndash P

d) times (Q

1 ndash 0)

to producers and a subsidy of bdeg or (Pw ndash P

d) times (Q

4 ndash Q

1) to im-

porters Producers would still receive Pw while consumers would face

a price of Pd

thus the name two-price scheme Of course an even highersubsidy could be paid to producers to further reduce imports and in-crease the producer price The obvious difficulty with this scheme is itsimpact on the government budget The subsidy costs have to be paidfor by some means Because of this cost few major commodities aresubsidized this way in developing countries although related schemesare common in developed countries such as the United States and Ja-pan and in Europe Two-price wheat programs have been operativehowever at various times in Brazil Egypt Mexico and a few otherlow-income countries Table 15-1 lists examples of past food subsidyprograms in developing countries

Developing countries often have food subsidy programs that aretargeted toward the poor or to nutritionally vulnerable groups Thesesubsidies can be implemented through ration shops ration cards foodstamps or other means Usually only the very poor are eligible to keepthe cost down but in some cases ration shops which sell basic grainsand other staples are located in poor neighborhoods under the theorythat only the poor will frequent them Alternatively self-targeting canbe achieved by subsidizing foods that the poor tend to buy such as


306


Co

un

try

Pri

nci

pal

fo

od

sT

yp

e o

f p

rog

ram

Fo

od

dis

trib

uti

on

Act

ual

co

ver

age

sub

sid

ized

(im

pli

cit

targ

etin

g)

Ban

gla

des

hW

hea

t an

d r

ice

Pri

ce s

ub

sid

yT

arg

eted

amp r

atio

ned

Mo

stly

urb

anB

razi

lW

hea

tP

rice

su

bsi

idy

Gen

eral

To

tal

po

pu

lati

on

Ch

ina

Ric

eP

rice

su

bsi

dy

Gen

eral

Mo

stly

urb

anC

olo

mb

iaS

elec

ted

Fo

od

sta

mp

sT

arg

eted

amp r

atio

ned

Po

or

ho

use

ho

lds

wit

h p

re-

pro

cess

ed f

oo

d s

cho

ole

rs o

r w

om

en w

ho

are

pre

gn

ant

or

lact

atin

gE

gy

pt

Wh

eat

Pri

ce s

ub

sid

yG

ener

alT

ota

l p

op

ula

tio

nE

gy

pt

Ric

eP

rice

su

bsi

dy

Rat

ion

edM

ost

ly u

rban

Eg

yp

tS

ug

ar t

ea f

roze

nP

rice

su

bsi

dy

Rat

ion

edT

ota

l p

op

ula

tio

nm

eats

fis

h

and

cert

ain

oth

er f

oo

ds

Ind

iaW

hea

t an

d r

ice

Pri

ce s

ub

sid

yR

atio

ned

To

tal

po

pu

lati

on

Mex

ico

Mai

ze a

nd

cer

tain

Pri

ce s

ub

sid

yG

ener

alM

ost

ly u

rban

oth

er f

oo

ds

Mo

rocc

oW

hea

tP

rice

su

bsi

dy

Gen

eral

To

tal

po

pu

lati

on

Pak

ista

nW

hea

tP

rice

su

bsi

dy

Rat

ion

edM

ost

ly u

rban

Ph

ilip

pin

esR

ice

and

oil

Pri

ce s

ub

sid

yT

arg

eted

amp r

atio

ned

All

ho

use

ho

lds

in a

reas

sel

ecte

dfo

r h

igh

lev

el o

f p

ov

erty

Sri

Lan

ka

(up

to

197

7)R

ice

Pri

ce s

ub

sid

yR

atio

ned

To

tal

po

pu

lati

on

(fro

m 1

979)

Ric

eF

oo

d s

tam

ps

Tar

get

ed amp

rat

ion

ed50

per

cen

t o

f p

op

ula

tio

nb

iase

d t

ow

ard

th

e p

oo

rS

ud

anW

hea

tP

rice

su

bsi

dy

Gen

eral

Mo

stly

urb

anT

hai

lan

dR

ice

Pri

ce s

ub

sid

yG

ener

alT

ota

l p

op

ula

tio

nZ

amb

iaM

aize

Pri

ce s

ub

sid

yG

ener

alM

ost

ly u

rban

Sou

rce

Per

Pin

stru

p-A

nd

erse

n

Foo

d S

ubs

idie

s in

Dev

elop

ing

Cou

ntr

ies

(Bal

tim

ore

Jo

hn

s H

op

kin

s U

niv

ersi

ty P

ress

19

88)

p

6

TA

BL

E 1

5-1

E

XA

MP

LE

S o

f E

XIS

TIN

G o

r P

RE

VIO

US

CO

NS

UM

ER

PR

ICE

SU

BS

IDY

PR

OG

RA

MS

in

DE

VE

LO

PIN

G C

OU

NT

RIE

S

307

starchy staples or maize Substantial savings can result from targetingin Sri Lanka targeting and program modification reduced outlays forconsumer food subsidies from 15 percent of total government expendi-tures to less than 3 percent3 The impact of targeted subsidies on agri-cultural prices and incentives depends on how they are financed butfood subsidies need not have adverse effects on agricultural incentives

Another common price-policy instrument in developing countriesis the export tax The purpose of an export tax is to raise governmentrevenues or reduce domestic commodity prices The effects of the taxare illustrated in Figure 15-2 Because the country exports the commod-ity the world price P

w is shown above the price P

0 which would have

prevailed domestically if there were no trade If exports were freelyallowed this world price would prevail in the domestic market and atotal quantity of Q

2 would be produced domestically Q

1 would be de-

manded by domestic consumers and the difference (Q2 ndash Q

1) would be

exported Then if an export tax equal to Pw ndash P

d were imposed the do-

mestic price would fall to Pd consumers would increase conshysumption

to Q3

producers would reduce the quantity supplied to Q4 exports

would decline to Q4 ndash Q

3 and the government would earn an export tax

revenue of (Pw ndash P

d) times (Q

4 ndash Q

3) or the area bcfg in Figure 15-2 Poor

countries may impose export taxes because they lack an alternativesource of revenue In the Figure 15-2 example the country is unable toinfluence the world price P

w because it is a small producer in the world

market for the commodity Domestic producers pay the cost of the taxthrough lower prices If the country is a large producer such as Brazilin the coffee market its exports and any export tax influence the worldmarket price Therefore part of the burden of the export tax can bepassed on to consumers in other countries

Governments follow many types of pricing policies those describedabove are among the most common and direct pricing instrumentsemployed in developing countries Another common direct-pricingpolicy is the attempt to stabilize commodity prices through a buffer-stock program With such a program supplies are purchased by thegovernment if the price drops below a certain minimum floor leveland then dumped on the market if the price rises above a certain ceilinglevel The purpose of the program is to stabilize short-run prices ratherthan alter the long-run price

3 Per Pinstrup-Andersen ldquoThe Social and Economic Effects of Consumer-OrientedFood Subsidies A Summary of Current Evidencerdquo Food Subsidies in DevelopingCountries (Baltimore Johns Hopkins University Press 1988) Chapter 1 pp 13ndash14


308


Figure 15-2 Economics of an export tax to raise revenue

Perhaps the most common indirect pricing policy in developingcountries is to overvalue the foreign exchange rate The foreign exchangerate is the value of the countryrsquos currency in relation to the value offoreign currency for example the number of Mexican pesos that equalone US dollar If the official foreign exchange rate implies that thelocal currency is worth more than it actually is and if exports occur atthe official rate then this overvalued exchange rate acts as an implicitexport tax However it does not provide tax revenue to the govern-ment More discussion of the trade effects of direct and indirect pricingpolicies is found in Chapters 16 and 18

Interventions to shift either the supply of or demand for agricul-tural products also affect prices Income transfer and employment pro-grams are examples of policies to shift demands Policies that steer in-vestments into different sectors credit programs agricultural researchand land reforms all affect supplies The net effect is to change equilib-rium prices in markets Governments can examine price trends and shiftsand treat them as indicators of an underlying problem In some casesthe problem is induced domestically but in other cases it is driven byinternational forces For example the rapidly increasing food pricesexperienced by most developing countries in 2008 were driven moreby international than domestic supply and demand factors

Prices provide important indicators of sector performance How-ever policies that attack the symptom mdash such as rapidly rising pricesmdash by perhaps directly imposing price controls can create long-run

309

damage to economic growth A preferred price intervention would beto address the causes of the problem by either investing in productiv-ity-enhancing technologies or by making more imports available Ifdemand lags behind supplies then programs to stimulate demandssuch as food stamps might be contemplated In general it is preferableto directly address the causes of undesirable price trends rather than todirectly intervene in the price formation process for reasons discussedbelow

Short- and Long-Run Effects of Pricing PoliciesA few of the direct short-run effects of food and agricultural pricingpolicies are illustrated in Figures 15-1 and 15-2 As producer and con-sumer prices are raised or lowered changes in production and con-sumption occur Producer incomes foreign exchange earnings pricestability and government revenues are also directly influenced by pricepolicies These and other direct and indirect short- and long-run ef-fects of pricing policies are summarized in Table 15-2

An important short-term effect of many price policies is to trans-fer income from producers to consumers Within consumer groups thepoor tend to be the most sensitive to food prices since they spend pro-portionately more income on food The poor are usually targeted eitherindirectly because a food they eat is subsidized or directly by beingprovided food stamps or access to ration shops However studies show

TABLE 15-2 SUMMARY of PRICE POLICY EFFECTS

Direct short-run effects of price policies1Changes in consumer and producer prices2 Changes in quantities produced and consumed3 Changes in exports imports and foreign exchange earnings4 Income transfers between and among consumer and producer groups5 Government budget effects6 Price stability effects7 Changes in marketing margins and their effects on efficiency of

resource allocation

Indirect and long-run effects of price policies1 Employment changes2 Incentives for capital investment3 Incentives for technical change4 Changes in health and nutrition5 Long-run changes in allocation of resources in production storage

transportation and processing


310


that even well-targeted price subsidy programs are associated with largeldquoleakagesrdquo to the non-poor These leakages imply higher program coststo the government and create distortions

A major feature of both direct and indirect effects of many pricepolicies is the influence of those policies on efficiency of resource allo-cation depending on the program In the short run resources are di-verted to less-productive uses because of the subsidy or tax Additionalindirect or long-run misallocation of resources can result as investmentsand structural changes occur that expand less-efficient sectors of theeconomy at the expense of more-efficient ones In addition efficiencylosses occur due to the resource costs associated with collecting taxesor administering the policy Food stamp and ration shop programs havefewer distortionary impacts because they shift food demands amongrecipient groups rather than working through price signals

Distortions in the normal price differences for a commodity acrosslocations between points in time and at different levels of processingcan influence storage transportation and processing of the commod-ity For example urban prices are normally expected to be higher thanrural prices for the same food commodity because of transportationcosts If the government sets a ceiling price that is equal in both ruraland urban areas transporting the good from the rural to the urban areamay no longer be profitable In fact in some cases governments havebeen known to set urban food prices lower than rural prices with theresult that food supplied by imports is transported from urban areasto rural areas

Likewise ceiling prices can discourage the normal seasonalstorage of a crop if prices are not allowed to rise to cover storagecosts Also if a government reduces the price margin allowed be-tween farm and retail levels processors and marketers can be forcedout of business

Pricing policies may be implemented through government pro-curement agencies with monopsonistic (single buyer) power Thus op-portunities are created for illegal garnering of rents by governmentemployees and inefficiencies can arise that may force additional re-ductions in farm prices These often unintended results of pricing poli-cies can be particularly severe in countries with poor communicationsand underdeveloped legal systems

Other indirect effects of pricing policies include employmentchanges incentives to develop and adopt new technologies and changesin health and nutrition If total revenues for one sector or commodityare raised through pricing policies more people may be employed Alsoproducer incentives to press private firms or public research agencies

311

for new technologies as well as incentives to adopt technologies maybe enhanced Consumer price subsidies can have important impacts onhealth and nutrition In cases where they are financed through govern-ment tax revenues and not by depressing producer prices they can bean effective means of transferring income to targeted groups

Once price policies are instituted they are difficult to repeal Ur-ban consumers in numerous countries have reacted in negative andsometimes violent manners to government attempts to lower subsidiesIn summary price-policy effects are pervasive and influence the effi-ciency of the production and marketing systems

MARKETING FUNCTIONS and DEFICIENCIESMarketing transforms products over time space and form through stor-age transportation and processing Through marketing goods are ex-changed and prices are set Markets communicate signals to producersprocessors input suppliers and consumers about the costs of buyingselling storing processing and transporting These major marketingfunctions and their linkages to price policies are summarized in Figure15-3

In the earliest stages of development and in remote areas a highproportion of the population lives on farms and is relatively self-sufficient The demand for agricultural marketing services is limitedAs development proceeds with resulting increased living standardsand urbanization the size and efficiency of the marketing system be-come more important Unless marketing services are improved con-currently with the development and spread of new technologies im-provements in education and credit and the other factors discussed inthis section of the book economic development will be hindered Aninefficient marketing system can absorb substantial private and publicresources and result in low farm-level and high retail-level prices

Marketing System Deficiencies in Developing CountriesPrivate marketing systems in many developing countries operate rela-tively well in that prices are influenced by underlying supply anddemand conditions Products are stored transported processed andexchanged in roughly the amounts expected given prevailing costs ex-cept where governments have intervened with price policies Pricerigging by opportunistic marketing agents is generally not a seriousproblem However because marketing costs can be high and some pricedistortions do occur marketing system deficiencies may retard the rateof agricultural growth and influence the distribution of the benefits of


312


that growth Letrsquos consider the nature of these deficiencies before turn-ing in the following section to the possible public role in solving them

The principal weaknesses in marketing systems in developingcountries are (1) infrastructure deficiencies which raise the cost of trans-port (2) producersrsquo lack of information (3) the weak bargaining posi-tion of producers of certain commodities and (4) government-inducedmarket distortions The magnitude of each of these deficiencies differsacross regions and by country and is changing for the better in many

Figure 15-3 Links between agricultural price policy and agricultural mar-keting (Source C Peter Timmer ldquoThe Relationship Between Price Policy andFood Marketingrdquo in Food Policy Integrating Supply Distribution and

Consumption ed J Price Gittinger Joanne Leslie and Caroline Hoisington(Baltimore Johns Hopkins University Press 1987) p 294)

313

countries but severe problems are found in some countries particu-larly in Sub-Saharan Africa The most visible effect of these weaknessesis to create a large spread between the prices producers are paid fortheir products and the retail prices Marketing system deficiencies alsocreate wide variations in producer prices within countries and withinyears Examples of producerretail price spreads and of intra-countryprice variations are presented in Table 15-3 for selected countries inAfrica and Asia The Sub-Saharan African countries have larger pricespreads than do the Asian countries indicating more-deficient mar-keting systems

Good communications (eg roads railroads telephones postalservices) and storage infrastructure are crucial to a well-functioningagricultural marketing system The availability and quality of ruralroads in particular have a strong influence on marketing costs and onthe willingness of farmers to adopt new technologies and sell any sur-plus production A farmer who has only a few hectares may still haveto market several tons of output to generate revenue needed to applynew seeds fertilizers and other modern inputs Telephones postal ser-vices radio stations and so on increase access to information Modernstorage facilities are important to minimize rodent insect and waterdamage while commodities are being held Most storage occurs on thefarm or at facilities owned by private traders Storage may also be pro-vided by the government for buffer stocks and food distribution pro-grams

Producers require information to improve market efficiency andreduce transactions costs as discussed in Chapter 11 Unequal accessto information can give a competitive advantage to particular groupsof farmers or traders who have more information When roads basictelecommunications and news services are lacking or are available onlyto a few those with better information on market prices crop pros-pects prospective changes in international forces and so on can earnhigher profits and in some cases gain political power as well Thusaccess to information is of fundamental importance for agriculturaldevelopment The wireless communications revolution is having a pro-found effect on information availability and hence marketing efficiencyLow-cost cell-phones are widely available in developing countries evenin relatively remote rural areas Vegetable producers from China toBrazil now receive price information through cell-phones Coffee pro-ducers in the Guatemalan highlands use beeper technology to receiveup-to-the-minute price information These innovations lower the costof attaining information enable farmers to retain more value on their


314


TABLE 15-3 PRODUCERCONSUMER and REGIONAL

PRICE SPREADS SELECTED AFRICAN and ASIAN COUNTRIES

Producerconsumera Regionalb

Country Commodity Price spread spread

Nigeria Maize 545 356Rice 570 729Sorghum 598 459

Malawi Maize 482 219Rice 551 682

Tanzania Maize 382 257Rice 566 613Sorghum 481 355

Kenya Maize 420 300

Sudan Sorghum 612 482Wheat 521

Indonesia Rice 840 719

India Rice 820 689Wheat 795 659Sorghum 800 635

Bangladesh Rice 790 750

Philippines Rice 878 827Maize 715 642

aProducer priceretail price X 100 bLowest pricehighest price X 100

Source Raisuddin Ahmed ldquoPricing Principles and Public Intervention in Domes-tic Marketsrdquo Chapter 4 in Agricultural Price Policy for Developing Countries edJohn W Mellor and Raisuddin Ahmed (Baltimore Johns Hopkins UniversityPress 1988) p 67

farms and enhance planning for deliveries lowering waste and im-proving efficiency

The structure of agricultural markets is usually such that the num-ber of middle agents is smaller than the number of producers Econo-mists hold differing views on whether relatively fewer such intermedi-aries result in monopolistic power on the part of the intermediary andan unfair bargaining advantage One needs to be cautious in drawing

315

Roadside market in Bangladesh

conclusions Because the more efficient traders and processors tend todeal in large volumes there are naturally fewer of these people thanthere are producers On the other hand in most countries with privatemarketing systems ease of entry is such that there are still enough pro-cessors and other middle agents to provide competition for each otherExamples of collusion and monopolistic power however undoubtedlyexist for certain products particularly in isolated areas where infor-mation is costly and where social and cultural factors play a contribut-ing role This form of market power is undergoing pressure from thetelecommunications revolution described above

A common marketing problem for producers of major commodi-ties in some developing countries is a situation in which government-controlled marketing organizations (often called parastatals) are givenmonopolistic power and legal authority to purchase all of a productwhile setting its price as well (see Box 15-1) As discussed in the price-policy section these tightly controlled markets can have negativeeffects on producer incentives and market efficiency Agricultural eco-nomic systems are inherently complex A large amount of informationis transmitted through market signals and decisions made by centralmarketing boards and parastatal agencies can create serious market dis-tortions If these types of government agencies are a cause of ratherthan a solution to marketing problems in developing countries howmight the public sector improve marketing efficiency This issue is ad-dressed in the following section


316


THE ROLE of the PUBLIC SECTOR in AGRICULTURAL

MARKETINGThe primary role of the government is to provide the infrastructurerequired for an efficient marketing system particularly roads a marketinformation system a commodity grading system and regulations toensure the rights of all participants The underlying rationale for gov-ernment involvement is the presence of public goods and market fail-ures creating externalities Public goods provide benefits to society as awhole but would be supplied in less than the socially desirable amountsby the private sector alone Externalities involve often unintended posi-tive or negative effects of the actions of one person (firm) or persons(firms) on other people

BOX 15-1

COMMODITY MARKETING BOARDS in SUB-SAHARAN AFRICAIn some Sub-Saharan African states publicly-sanctioned monopolies stillpurchase and export agricultural goods These marketing boards serve asthe sole buyers of major exports purchase crops at administratively deter-mined prices and sell them at prevailing world market prices These statemarketing agencies are vestiges of the colonial period and their originsand histories vary considerably Many were established during the GreatDepression of the 1930s or World War II Their official mandates werealmost invariably to benefit producers by reinvesting revenues in agricul-ture and especially stabilizing producer prices

As the colonial governments were confronted with growing needs forrevenues they quickly found ways of diverting marketing board funds awayfrom agricultural development and into general revenue coffers Followingindependence African governments continued to use the commodity mar-keting boards as extensions of their normal revenue-generating arms andthe initial purposes of the boards were ignored Examples are found inGhana and Nigeria immediately following independence

Since colonial times these boards have been used to transfer re-sources from agriculture into ldquomodernizingrdquo and mostly urban developmentThey have served political objectives by raising revenues increasing em-ployment of favored groups and keeping primary commodity prices low tobenefit urban and industrial concerns The boards never really fulfilled theirmandate to improve and stabilize conditions in agriculture In combinationwith other policy distortions they contributed to the stagnation and declineof agriculture in many African countries

317

Provision of InfrastructureThe private sector can be expected to build many of the required stor-age facilities processing plants and so on but investments in roadsseaports airports and in most cases telecommunications will requiregovernment involvement One firm or even a small group of firmswill lack the incentives to build sufficient roads not just because oftheir high cost but because of the difficulty of excluding others from orcharging for their use Roads are a public good that serve all industriesconsumers and national defense

Several studies have estimated the economic importance of roadsto agriculture in developing countries For example Spriggs estimateda benefitcost ratio of 8 for surfaced roads in the eastern rice regions ofIndia4 Ahmed and Hossain estimated that incomes were roughly one-third higher for villages with better infrastructure compared to thosewith poor infrastructure in Bangladesh5 Fan and Chan-Kang foundthat even low-quality rural roads in China are excellent investmentswith a 5-1 benefit cost ratio6 The evidence in numerous countries sug-gests that investments in infrastructure have greatly narrowed farm-retail margins

Provision of InformationProvision of accurate crop and livestock reports requires investmentsin data collection and dissemination Production and consumption datamay be poor quality but accurate data on marketed quantities quali-ties and prices can give essential information for formulating agricul-tural policies and for decisions by individual economic agents

To ensure equal access to information data need to be collected inall-important markets and disseminated on a regular basis Informa-tion on current market prices crop prospects and factors influencingdemand can be spread through radio broadcasts and newspapers oncethe government reports are released An efficient competitive marketrequires widespread access to information Otherwise a small group

4 John Spriggs ldquoBenefit-Cost Analysis of Surfaced Roads in the Eastern Rice Region ofIndiardquo American Journal of Agricultural Economics vol 59 (May 1977) pp 375ndash79

5 Raisuddin Ahmed and Mahabub Hossain Developmental Impact of Rural Infra-structure in Bangladesh International Food Policy Research Institute ResearchReport No 83 (Washington DC October 1990) p 70

6 See Shenggen Fan and Connie Chan-Kang Road Development Economic Growthand Poverty Reduction in China International Food Policy Research Institute Re-search Report No 138 )Washington DC 2005) Chapter 4 in this research reportcontains an extensive review of research findings about infrastructure and incomegrowth in developing countries


318


of large-scale farmers traders or processors can gain market power atthe expense of small farmers particularly those in remote areas Theseagents can then use the resulting profits to influence political and eco-nomic policy to favor themselves The result is both efficiency losses(reduced economic growth) and distributional inequities

In economies highly oriented toward subsistence production mar-kets offer few premiums for higher-quality products As interregionalcommunication and particularly export trade develops quality stan-dards increase in importance because buyers need to compare the prod-ucts of many different sellers often without seeing the product beforethe sale In markets using modern technology purchases are often madeelectronically or over the phone something that can only happen witha recognized system of grades and standards

Threshing drying cleaning storage and processing practices forcrops and feeding slaughtering storage and other practices for live-stock influence the quality of the final product Unless grades and stan-dards are established with corresponding price differentials then pro-ducers and processors have little incentive to incur the costs of produc-ing higher quality goods

RegulationsMarket regulations related to factors affecting health and safety butalso to weighing practices and other legal codes that influence the en-forceability of contracts are important to a well-functioning marketingsystem The purposes of many of these regulations are to ensure basichonesty and reduce transactions costs in marketing As discussed inChapter 11 development brings with it a reduction in personal exchangeand associated social and cultural constraints on behavior Increasedimpersonal exchange requires new institutional arrangements to sub-stitute for the rules of behavior that had been imposed previously by amore personal society

The importance of market regulations does not imply a need forheavy involvement of government marketing boards or other publictrading agencies Banning private marketing activities does not improvethe welfare of either farmers or consumers While there is a role for thegovernment in the activities discussed above and perhaps in imple-menting a price stabilization scheme more extensive public monopoli-zation of domestic marketing functions tends to produce high market-ing costs and large market distortions

319

THE CHANGING STRUCTURE of FOOD MARKETSAt the retail level in developing countries there has been a restructur-ing in urban areas which began in earnest during the 1990s towardincreased involvement of large wholesalers and supermarkets in foodmarketing In a few cases the supermarkets are owned by multina-tional companies and in most cases the result has been higher qualityproducts and more efficient (lower-cost) marketing These markets arehowever increasingly forcing small-scale retailers out of business justas they did in many developed countries Before the advent of super-markets local brokers or small-scale wholesalers brought relativelyundifferentiated commodities from the rural areas to small shops orcentral markets in the urban areas In most of the developing worldthis structure still predominates However increasingly large and of-ten specialized wholesalers bring products from the rural areas to largerprocessors supermarkets and food service chains in urban areas7

As market structures change they do so unevenly in the develop-ing world with urban retail markets changing before rural marketsand certain geographic areas undergoing a more rapid transformationthan others For example according to Reardon and Timmer the de-gree of transformation is greatest in South America East Asia outsideof China and North-central Europe The second wave of market changeis occurring in Central America and Mexico Southeast Asia South-central Europe and South Africa and the third wave is just beginningin South Asia China Eastern Europe and parts of Africa8

The market transformation tends to include five sets of changes(1) a shift from raw commodities to more specialized products (2) rapidorganizational change involving consolidation in the processing andretail segments of the food system with the rise of supermarkets (3)institutional change in the markets with the rise of contracts andprivate grades and standards for food quality and safety (4) rapid tech-nological and managerial change among suppliers wholesalers andretailers and (5) distributional and technological impacts of the whole-sale and retail market changes back on farmers

Efforts are needed to prepare poor and small-scale producers toaccess these new marketing channels improve quality adhere to size

7 See Thomas Reardon and C Peter Timmer ldquoTransformation of Markets for Agricul-tural Output in Developing Countries Since 1950 How Has Thinking ChangedrdquoChapter 13 in Handbook of Agricultural Economics Volume 3 Agricultural Develop-ment Farmers Farm Production and Food Markets ed RE Evenson P Pingali andTP Schultz (Amsterdam Elsevier 2006)

8 Reardon and Timmer ldquoTransformation of Markets for Agricultural Outputrdquo


320


and other standards and develop organizational and contracting skillsOff the farm impacts of this retail revolution on participants in tradi-tional supply and retailing channels are not well-understood but maybe substantial Reardon and Timmer provide a detailed synopsis of whathas occurred in food markets in developing countries since the 1950sand the reasons for those changes9

The growth in demand for horticultural products that has occurredas incomes have grown over time especially in Asia has producedopportunities for small-scale producers if they can organize intermedi-ate-level assembly of high quality products to fill contracts with whole-salers and even retailers Efforts to organize small vegetable and fruitproducers into cooperatives and other group associations for this pur-pose has the potential to significantly raise incomes The public sectorcan assist by providing information to meet the demands in the marketchain for these relatively high value products (see Box 15-2)


BOX 15-2

DEVELOPMENT of VEGETABLE MARKET INTERMEDIARIES

in NEPALMarketing of horticultural products is a major challenge in Nepal becauseof the large number of smallholder producers in geographically isolatedareas with poor infrastructure High transaction costs in aggregating pro-duction to marketable volume and limited market information constrain ef-ficient and competitive marketing The large number of small producershinders quality control and coordinated production scheduling Abundantfamily labor reduces labor supervision costs but a mechanism is neededto coordinate product marketing beyond the farm level With public sup-port a series of local marketing and planning committees (MPCs) havebeen established to manage community market collection centers Throughthese collection centers produce is sold to traders who have access tolarger more lucrative markets than are available locally This institutionalmechanism has been highly successful and grown rapidly since 2003 TheMPCs provide information to help their members plan market-led produc-tion and they provide loans for agricultural inputs They also lobby the gov-ernment to influence policy Each MPC has representatives from five to 12farmer groups each of which has 15-20 members When an MPC is well-established it can register as a cooperative and gain legal backing thatmakes available more attractive financing options

321

SUMMARYFood and agricultural prices are major determinants of producer incen-tives and of real incomes in developing countries Governments in thosecountries often adopt pricing policies to reduce food prices for urbanconsumers at the expense of producers Political leaders devise policiesto meet societyrsquos objectives and the demands of interest groups to gen-erate revenue and in some cases to line their own pockets Govern-ments can influence agricultural prices by setting price ceilings or floorsand enforcing them with subsidies taxes manipulation of exchangerates storage programs quantity restrictions and other policy instru-ments These interventions influence producer and consumer prices andincomes production and consumption foreign exchange earnings pricestability government revenues the efficiency of resource allocationemployment capital investment technical change health and nutri-tion and marketing margins

Marketing refers to the process of changing products in time spaceand form through storage transportation and processing Goods areexchanged and prices are determined in markets The importance ofthese functions increases as markets become more commercializedDeveloping countries often have marketing systems characterized bydeficient infrastructure inadequate information weak bargaining po-sition for producers for certain commodities and government-induceddistortions The government can help solve certain marketing deficien-cies particularly the lack of roads and information The public sectorcan provide a system of grades and standards as well other regula-tions These contributions can help reduce transactions costs that riseas markets become less personal Governments should avoid the largerparastatal marketing agencies that tend to introduce marketing distor-tions

Private marketing systems have gradually evolved over the past50 years in developing countries with many countries currently expe-riencing a shift from raw commodities being sold in small shops to moredifferentiated food products being assembled and processed by largerwholesalers Supermarkets are increasingly opening in the urban areasof the richer developing countries This market consolidation is likelyto continue at a fast pace in the future and will have profound impactson producers consumers and middle agents


322


IMPORTANT TERMS and CONCEPTSBuffer-stock programs Middle agentsCompetitive market MonopsonyExport tax ParastatalExternalities Price ceilingForeign exchange rate Price distortionsGrading system Price floorInfrastructure Price formationInterest groups Pricing policiesMarket information Public goodMarket regulations Resource allocation efficiencyMarketing board SupermarketsMarketing functions Time space and formMarketing margin Two-price programs

Looking AheadThis chapter concludes the discussion of technical and institutional fac-tors that can influence development of the agricultural sector The fol-lowing set of chapters moves beyond the agricultural sector and con-siders international trade macroeconomic forces international capitalflows and other policies that feed back on agricultural developmentWe begin in the next chapter by considering the importance of interna-tional trade Problems faced by developing countries with respect toagricultural trade and potential solutions to those problems are ex-plored

OUESTIONS for DISCUSSION1 Why do developing country governments frequently set agricul-

tural prices below market levels2 Why do governments get involved in stabilizing prices3 What are the direct short-run effects of price policies in agriculture4 What are the indirect and long-run effects of price policies in

agriculture5 Draw a graph to illustrate the effects on supply and demand of a

price ceiling set above the market equilibrium price6 Draw a graph to illustrate the effect of a price support to farmers

set above the market equilibrium price7 What are the major food marketing functions Why are these

functions necessary to get agriculture moving in developingcountries

8 What are the major deficiencies in agricultural marketing systemsin developing countries

323

9 What role might the government play in improving an agriculturalmarketing system

10 Discuss the potential role of buffer stocks in an agricultural devel-opment program in a developing country

11 Why might government marketing boards and parastatals createinefficiencies in resource use

12 Why do governments in developing countries use export taxes onagricultural commodities more frequently than do governmentsin more developed countries

13 Why does the increasing impersonal exchange that accompaniesdevelopment imply a need for increased government regulation

14 Why are marketing grades and standards important15 Why does increased market information improve marketing

efficiency16 What has happened to the growth of supermarkets in developing

countries over the past few years and why

RECOMMENDED READINGSAnderson Kym and Yujiro Hayami The Political Economy of Agricultural

Protection (Sydney Allen and Unwin 1986)Byerlee Derek and Gustavo Sain ldquoFood Pricing Policy in Developing

Countries Bias Against Agriculture or for Urban Consumersrdquo Ameri-can Journal of Agricultural Economics vol 68 (November 1986) pp 961ndash69

Fan Shenggan and Connie Chan-Kang Road Development Economic Growthand Poverty Reduction in China International Food Policy Research Insti-tute Research Report No 138 (Washington DC 2005)

Gittinger J Price Joanne Leslie and Caroline Hoisington eds Food PolicyIntegrating Supply Distribution and Consumption (Baltimore JohnsHopkins University Press 1987)

Krueger Anne O Maurice Schiff and Alberto Valdes ldquoAgricultural In-centives in Developing Countries Measuring the Effects of Sectoral andEconomywide Policiesrdquo World Bank Economic Review vol 2 (September1988) pp 255ndash71

Pinstrup-Andersen Per ed Food Subsidies in Developing Countries (Balti-more Johns Hopkins University Press 1988)

Reardon Thomas and C Peter Timmer ldquoTransformation of Markets forAgricultural Output in Developing Countries Since 1950 How HasThinking Changedrdquo Chapter 13 in Handbook of Agricultural EconomicsVolume 3 Agricultural Development Farmers Farm Production and FoodMarkets ed RE Evenson P Pingali and TP Schultz (AmsterdamElsevier 2006)


324

Streeten Paul What Price Food Agricultural Price Policies in Developing Coun-tries (Ithaca NY Cornell University Press 1987)

Timmer C Peter Getting Prices Right The Scope and Limits of AgriculturalPrice Policy (Ithaca NY Cornell University Press 1986)

Timmer C Peter Walter P Falcon and Scott R Pearson Food Policy Analysis(Baltimore Johns Hopkins University Press 1983) Chapter 4


325

PART 5

Agricultural Development in anInterdependent World

Wheat being loaded on a ship

326

327

CHAPTER 16

Agriculture andInternational Trade

The evidence over the past four decades is suggestive hellip that im-proved trade opportunities for developing countries hellip could makean important contribution to growth and hence poverty reductionover time mdash William R Cline1

THIS CHAPTER1 Explains why countries trade2 Describes the recent experience of developing countries with trade

and why trade patterns change as economic development occurs3 Discusses problems that impede developing countries from realizing

their trade potential with respect to agriculture

WHY COUNTRIES TRADEThe role of international trade in economic development was one of thefirst questions ever addressed by economists and has been hotly de-bated throughout history (see Box 16-1) Today despite some views tothe contrary most scholars agree that relatively open trade is helpfulfor successful economic development and that government trade re-strictions generally make growth slower and less sustainable In thischapter we ask why open trade facilitates growth and also why somany governments choose to restrict trade despite its potential eco-nomic benefits

Need for Imports and ExportsTrade facilitates development because it helps a country obtaingreater benefits from its productive resources by exporting what it

1 William R Cline Trade Policy and Global Poverty (Washington DC Institute for In-ternational Economics 2004) p 45

328

PART 5 mdash AGRICULTURAL DEVELOPMENT IN AN INTERDEPENDENT WORLD

can produce relatively easily and importing items that are relativelymore difficult to produce Most countries import and export the samegoods year after year but especially in agriculture there can be widefluctuations in the quantities traded due to temporary shortages or sur-pluses Absorbing change through fluctuations in trade volume can helpkeep domestic prices more stable than they would be with no change inquantities traded Furthermore most countries also run persistent tradesurpluses or deficits from year to year with offsetting flows of capitalinto or out of the country Net inflows of foreign investment are matchedby trade deficits and net outflows are linked to trade surpluses Wheninvestment flows change there may be a sudden need to alter tradepatterns accordingly

BOX 16-1HISTORICAL ROOTS of INTERNATIONAL TRADE DEBATE

Trade among countries has existed for thousands of years most of thattime in a very loosely structured system By the sixteenth and seventeenthcenturies money goods and credit markets had developed to facilitatetrade and colonial expansion An economic doctrine known as mercantil-

ism encouraged exports but discouraged imports The preferred form ofpayment was gold rather than goods A wide range of restrictive trade poli-cies was implemented including tariffs licenses export subsidies andgeneral state control of international commerce As the Industrial Revolu-tion spread in the late 1700s mercantilist ideas were increasingly ques-tioned Raw materials for expanding factory output were imported andmarkets for the output were sought abroad Technological advances intransportation and communications further stimulated trade

A strong movement toward economic liberalization began in the early1800s Perhaps the most important factor in the movement was the unilat-eral removal of trade restrictions in the United Kingdom The worldrsquos lead-ing economic power at the time the United Kingdom repealed its CornLaws in 1846 ending the worldrsquos first major price-support program for ag-ricultural commodities Britain then sought worldwide trade liberalizationwith some success World trade was relatively free until World War I al-though several countries including the United States and Germany fol-lowed selective protectionist policies World War I changed the tradingenvironment Industries including agriculture that had expanded duringthe war suffered slack demand and falling prices afterward Governmentsattempted to protect these industries by introducing protectionist policiesduring the 1920s and 1930s that the world is still struggling to removetoday Persistent protectionist policies for agricultural products are espe-cially evident

329

CHAPTER 16 mdash AGRICULTURE AND INTERNATIONAL TRADE

Comparative AdvantageSurprisingly the rationale for trade does not depend on absolute costdifferences between countries Absolute cost differences determine acountryrsquos wealth not its pattern of trade Trade is driven by relative costdifferences among goods within each country as countries export goodswhose cost is relatively low in terms of other goods This principle ofcomparative advantage first articulated by David Ricardo in 1817 statesthat it is best for each country to export those goods for which it has thegreatest relative cost advantage and to import goods which are rela-tively more costly The principle implies that one country could pro-duce all goods at lower cost than other countries yet it would still raiseits standard of living through trade exporting what it produces rela-tively best (see Box 16-2) What counts is the opportunity cost in terms ofother goods

Despite the logic of comparative advantage and the historical evi-dence of gains from trade governments routinely intervene to limitimports and exports Contemporary economists usually explain theseinterventions in terms of differences in lobbying power among thosewho gain and those who lose from these interventions as described inthe next section Other observers however may argue that trade re-strictions are actually in the countryrsquos national interest Proponents oftrade restrictions often claim that trade opens the economy to increasedexploitation by the more-developed countries by multinational corpo-rations and other actors in international markets and by the wealthyelites within their own countries Another important argument againstopen trade has been that the terms of trade or the prices received forexports from developing countries compared to the prices paid for im-ports tend to decline over time (see Chapter 6 for a discussion of thisldquostructuralistrdquo perspective) Prices for developed-country products arealso said to be high because of monopolistic behavior by sellers of de-veloped-country products that are imported by developing countriesand protectionist measures by governments in the more-developedcountries Some have also argued that dependence on internationalmarkets for food endangers national security since international mar-kets are volatile and unpredictable Finally advocates for trade restric-tions have argued that ldquoinfant industriesrdquo may need to be protectedfrom international competition in order to survive The solutions to theseperceived problems are import-substitution policies that try to move acountry towards self-sufficiency Examples of these policies are directimport restrictions setting of foreign exchange rates above the marketequilibrium (which discourages exports for reasons discussed below)

330


BOX 16-2ILLUSTRATION of the PRINCIPLE

of COMPARATIVE ADVANTAGETo illustrate the principle of comparative advantage consider two coun-tries each of which can choose how much to produce of two kinds ofoutputs manufacturing (MFG) and agriculture (AGR) The production pos-sibilities frontier (PPF) for each country is shown below indicating themaximum (or total) amount of MFG and AGR that each country can pro-duce given their resources and technology For simplicity both PPFs areshown as straight lines In our example country A can produce 15 units ofMFG and no AGR or 10 units of AGR and no MFG and any combination inbetween such as 75 MFG and 5 AGR Country B can produce up to 40units of MFG and no AGR or 20 units of AGR and no MFG or any combi-nation in between

Each country can potentially gain from trade by exporting what it canproduce at a lower relative cost as compared to the other country In thisexample the relative cost of production is shown by the slopes of the PPFlines In country A each unit of AGR costs 15 unit of MFG to producewhereas in country B that same unit would cost 2 units of MFG As a resulta trader could buy a unit of AGR in country A for a bit more than 15 units ofMFG and sell it to someone in country B for a bit less than 2 units of MFGproducing a total gain from trade of almost 5 units of MFG per unit of AGRthat is exported from A to B

How the gains from trade are divided between the countries dependson the relative bargaining power and the demands for MFG and AGR ineach country but the overall size of the gains and the direction of tradedepend only on differences in relative costs It does not matter whether A isalways less productive than B or AGR is always less productive than MFGCountry A can still exploit its comparative advantage in this case by spe-cializing in and exporting AGR to obtain more of both goods than it couldproduce in self-sufficiency Likewise Country B can exploit its comparativeadvantage (relative cost advantage) in MFG by specializing in and export-ing MFG to Country A

331


and export taxes that discourage exports and stimulate production forthe local market instead

Although most economists favor freer trade there are debateswithin economics regarding (1) the degree to which any gains fromtrade will in fact be retained in the developing country and be rela-tively broadly distributed and (2) the magnitude of the efficiency lossesresulting from attempts to become relatively self-sufficient throughimport-substitution policies Few dispute the potential for gains fromtrade most desire that any gains be broadly distributed and most agreethat increased trade can result in both gainers and losers even if totalgains are larger than total losses

In recent decades most countries have chosen to be relatively opento international trade with some variation in the degree of opennessMost empirical evidence supports the view that trade restrictions typi-cally limit economic development In fact when the world or a groupof countries wants to punish a nation the first step taken is often torefuse to trade with it

Gainers Losers and the Politics of Trade PolicyDespite the potential for significant economic gains from trade and ac-companying specialization international trade policies are a frequenttopic of bitter dispute Policy makers farm groups consumer advo-cates labor leaders and environmental groups constantly debate thebenefits and costs of trade restrictions that affect exports imports thebalance of payments prices jobs and the environment A major reasonfor such contentiousness is that some people will lose from freer tradeeven as others gain Much of the tendency for governments to restricttrade stems from the fact that trade restrictions can generate highly con-centrated and easily visible gains while spreading their cost broadlyamong the population over time For example protecting a particularindustry generates immediate high-wage employment and other ben-efits in that sector at a cost that is spread over many other activities inthe country Advocates for the protection can readily identify the win-ners and tell their story whereas the losses can be seen only throughabstract reasoning and aggregate statistics

The groups which are best able to act collectively and lobby policymakers tend to see trade policies enacted in their favor even thoughdoing so may impose even greater costs on other less influential groupsAgricultural lobbies are particularly strong in Europe and Japan andhave obtained relatively large income transfers from other sectorsWithin the United States some commodity groups such as those forsugar and cotton have been particularly successful in securing

332


government benefits over time Representatives of various sectors maylobby together for favorable policies forming coalitions either withinor across larger political parties and interest groups

An important fact about trade policy is that while the debate of-ten focuses on foreign countries the actual effect of a policy changeoccurs mainly within the restricting country Any trade restriction mayhave some impact on world prices and hence economic conditions inforeign countries but most of its effect is on domestic prices and in-come transfers among the countryrsquos own citizens

DEVELOPING COUNTRY EXPERIENCE with TRADEDuring the 1950s and 1960s import-substitution policies predominatedin many developing countries These inward-oriented policies helpedproduce a decline in the ratio of exports to GDP in many developingcountries until the early 1970s Since that time the ratio of exports toGDP has generally increased paralleling an overall expansion in worldtrade However many developing countries still pursue import-substitution policies Countries that followed these policies for severalyears for example Argentina India and Egypt tended to grow moreslowly than those that followed more open-trading regimes for exampleMalaysia South Korea and Botswana While it is difficult to generalizebased on a few cases studies that have examined the overall statisticalsignificance of trade restrictions have generally found a negative im-pact on economic growth

It is often difficult to classify a country as relatively open or rela-tively restricted because policies change over time Many African gov-ernments for example imposed increasingly restrictive agriculturaltrade policies on themselves in the 1970s and then moved to more openagricultural trade in the 1990s2 The Mexican economy was quite closeduntil 1985 but has been relatively open since then Even South Koreawhich is often cited as an example of a successful export-orientedeconomy has imposed substantial restrictions on trade from time totime Trade intervention is usually a matter of degree

Changing Structure of TradeTotal trade has grown for developing countries over the past 30 yearsBut the share of agricultural exports in developing country trade hasdeclined steadily from about 60 percent of total exports in 1955 to about20 percent in recent years This lower share partly reflects the import-

2 For details see Kym Anderson and William A Masters eds Distortions to Agricul-tural Incentives in Africa (Washington DC The World Bank 2008)

333


substitution policies mentioned above but it mainly reflects the impactof income growth with faster increases in both demand and supply ofmanufactures than of agricultural products at the global level as wellas increased domestic demand for food within developing countriesNevertheless several developing countries still depend on a few agri-cultural exports for a major share of their foreign exchange earnings

The dramatic shift in export composition towards manufactures isbest illustrated by Southeast Asian countries such as Indonesia Malay-sia The Philippines Singapore and South Korea with the data shownin Table 16-1 As these countries invested in human and physical capi-tal their comparative advantage in exports shifted from land-intensiveand low-skill labor-intensive activities such as agriculture to more skill-intensive and capital-intensive products such as manufactures Agri-cultural exports were often a very important source of foreign exchangeearnings in the past but other sectors grew faster over time

As countries develop their agricultural sectors do not disappearbut tend to become more specialized Tropical countries have a naturalcomparative advantage in relatively heat-tolerant tree crops such ascoffee cocoa tea rubber and bananas or other crops that grow year-round such as sugar Technological change can affect where crops growbest as shown for example by the increased exports of citrus and soy-beans from developing countries

Increased demand by more-developed countries for many of theagricultural exports of developing countries are limited due to rela-tively small income elasticities of demand for those commodities andin some cases to the development of synthetic substitutes (eg for rub-ber jute sisal cotton) On the other hand domestic demand for foodwithin the developing countries often increases rapidly with develop-ment Not only are populations growing but a high proportion of anyincome increases are spent on food The quantity consumed increasesand the mix of foods shifts toward more expensive products (often meatsand vegetables wheat and certain other grains rather than roots) As aresult the more rapidly growing middle-income countries have actu-ally become less self-sufficient in food production over the past twodecades even as their agricultural production and incomes have risenTheir increased imports have come partly from other developing coun-tries and partly from high-income food exporters such as the UnitedStates

Some countries have reacted to increased domestic demand forfood by setting artificially low prices for food commodities and over-valuing their exchange rates to tax exports and lower the prices of im-ports These policies tend to be counterproductive as they discourage

334


TA

BL

E 1

6-1

S

TR

UC

TU

RE

of

EX

PO

RT

S f

or

SE

LE

CT

ED

SO

UT

HE

AS

T A

SIA

N C

OU

NT

RIE

S 1

96

5ndash

20

05

P

erce

nta

ge

shar

e o

f to

tal

mer

chan

dis

e ex

po

rts

Ag

ricu

ltu

ral C

om

mo

dit

ies

Man

ufa

ctu

red

Pro

du

cts

Co

un

try

19

65

19

75

19

85

19

95

2005

1

96

51

97

51

98

51

99

52

00

5

Ind

on

esia

46

12

67

50

11

35

14

7M

alay

sia

50

34

18

62

51

72

77

57

5P

hil

ipp

ines

25

10

51

16

12

27

41

89

Sin

gap

ore

26

12

41

03

04

25

18

48

1S

ou

th K

ore

a9

21

11

59

81

91

92

91

No

te

Ind

on

esia

dat

a fo

r 19

65 a

re m

issi

ng

v

alu

es s

ho

wn

are

fo

r cl

ose

st a

vai

lab

le y

ear

(196

2)

Sou

rce

Wo

rld

Ban

k

Wo

rld

Dev

elo

pm

ent

Ind

icat

ors

200

9 (o

nli

ne

at w

ww

wo

rld

ban

ko

rg

dat

a)

335


production The effects of exchange rate manipulation are discussed inmore detail in Chapter 18

Trade Employment and Capital InteractionsEmployment growth is crucial for economic development While fewpeople are totally idle there is clearly underemployment in most de-veloping countries By underemployment we mean people working onlypart-time or in very low-productivity jobs Several possible linkagesexist between trade and employment One such linkage is the effect oftrade on overall growth through more efficient resource allocation as-suming faster growth entails more employment A second linkage isthat export industries in countries in early stages of development tendto be labor-intensive consistent with the Factor Endowment Theory ofTrade (see Box 16-3) Thus increased exports might lead to greater em-ployment A third possible linkage is that trade policies might influ-ence the degree of labor intensity in all industries For example tradepolicies might encourage capital-intensive industries through subsi-dized capital-goods imports

Empirical evidence suggests that increased exports from develop-ing countries including agricultural exports have positive employmentimplications Those countries that have followed import-substitutionpolicies (eg India) have suffered greater employment problems thanmore open economies Research in several countries by the InternationalFood Policy Research Institute (IFPRI) indicates that an export-orientedagriculture increases the demand for hired labor raises family incomesand benefits both landowners and landless laborers3 Small-scale farm-ers who produce sugarcane non-traditional vegetables and other cashcrops for export usually maintain some production of subsistence cropsas insurance against market and production risk but these farmers alsobenefit from the additional income from the cash crops

The Role of Trade in Agricultural DevelopmentAgriculture has many roles to play in economic development and tradecan affect the relative importance of these different roles In fact anoutward-looking trade orientation helps solidify the role of agriculturein development especially if the outward orientation is accompaniedby an agriculture- and employment-based growth strategy Removalof impediments to trade will facilitate exports and thus will enhance

3 Several studies conducted by Joachim Von Braun and others at the InternationalFood Policy Research Institute involved farm and household surveys in Guate-mala The Gambia Rwanda and elsewhere

336


BOX 16-3FACTOR ENDOWMENT THEORY of TRADE

The Factor Endowment Theory of Trade (often called the Heckscher-Ohlin-Samuelson Theory because it is derived from their work) argues thatbecause countries have different factor endowments they adopt differentproduction techniques and the result is profitable trade A country withrelatively abundant labor (compared to land and capital) will have a lowwage rate relative to land prices rents and interest on capital-borrowingSuch a country will find it optimal to adopt labor-intensive rather thancapital-intensive technologies The opposite would be true for capital-abundant countries Without trade the price ratio of labor-intensive goodsto capital-intensive goods will be lower in the labor-abundant country thanin the capital-abundant country Opening the country up to trade wouldmean that the labor-abundant country would export labor-intensive goodsin exchange for capital-intensive goods Trade will have the effect of in-creasing the demand for the abundant factor thus bidding up its price andincreasing the supply of the scarce factor (in the form of imported goods)thereby reducing its price Trade is expected to reduce factor price differ-ences between countries

This discussion is drawn from David Colman and Trevor Young Principles of

Agricultural Economics Markets and Prices in Less Developed Countries (Cam-bridge Cambridge University Press 1989) pp 232ndash34

the foreign exchange contribution of agriculture An open-trading re-gime helps provide accurate signals of relative resource scarcity to pro-ducers and to investors the abundance of labor usually found in mostdeveloping countries signals the need for employment-intensive invest-ment With no bias in favor of capital-intensive industries demandsfor capital-intensive manufacturing processes can be met through im-ports increasing the importance of agriculturersquos labor contribution

The food and fiber contribution of agriculture under an outward-looking strategy is usually of most concern to policymakers Fear ofexcessive reliance on imports to meet domestic food needs can lead toprotectionist policies But protection raises the cost of food and com-bining freer trade with more investment in domestic agricultural pro-duction usually results in faster and more stable economic growth Ofcourse if growth in demand exceeds domestic food production thenimports may be needed to fill the gap but these imports should beviewed as evidence of success in generating employment and incomegrowth Income growth will enhance food security and open trade willreduce reliance on often unstable domestic food production

337


TRADE IMPEDIMENTSThe variety of agricultural trade strategies that exists in developingcountries reflects differences in resource endowments history foodsecurity sources of government revenues balance of payments and soon This variety also indicates differences in perceptions about the abil-ity of markets to generate prices consistent with desired income distri-butions Virtually no country in the world operates with a completelyfree-trade regime Most developing countries employ trade policies thatdiscriminate against the agricultural sector as discussed in Chapter 15Domestic trade policies however are just one of the impediments toagricultural trade In this section we discuss the major constraints totrade and in Chapter 17 we suggest potential solutions to trade prob-lems Impediments to agricultural trade for developing countries canbe classified into three major categories (1) external demand constraints(2) restrictive trade policies at home and (3) market instability

External Demand ConstraintsDeveloping countries have long been concerned that as producers ofprimary products they face relatively inelastic demands in more-developed countries With inelastic demands additional exports mayresult in a fall in world prices for the commodities While individualcountries face relatively elastic export demands when several coun-tries that export the same products (eg cocoa coffee bananas etc) alltry to increase exports simultaneously prices might fall by a higherpercentage than export quantities increase Thus their collective ex-port revenues could decline even as export quantities grow An impor-tant recent example is the coffee crisis that began in the late 1990s asVietnam Indonesia and other relative newcomers to coffee produc-tion began to expand their exports World prices of coffee fell to around$50lb compared to average prices of $120lb during the 1980s Pricesduring the early 2000s were so low that an estimated 540000 workersin Central America lost their jobs as coffee farms discontinued harvest-ing4 After 2004 coffee prices partially recovered as supplies tightenedbut temporary job losses caused permanent harm to many householdsSustained declines in export prices can cause worsening terms of tradein the long run as well Historical evidence suggests that the terms of

4 See Panos Varangis Paul Siegel Daniele Giovannucci and Bryan Lewin ldquoDealingwith the Coffee Crisis in Central America Impacts and Strategiesrdquo The WorldBank Development Research Group Policy Research Working Paper 299 (March2003)

338


trade for developing countries may indeed have declined over time astheir output growth has outpaced increases in demand5

Trade Restrictions in More-Developed CountriesThe demand for certain LDC agricultural exports is affected by traderestrictions in more-developed countries (MDCs) The MDCs are moreprotectionist of their agricultural than of their industrial productsWhereas LDCs often discriminate against agriculture MDCs often sup-port farm prices above market equilibrium levels in hope of support-ing farm incomes (see Chapter 15) Thus MDCs have to restrict im-ports to avoid supporting the whole worldrsquos prices Restrictions par-ticularly affect exports from temperate and subtropical areas of LDCsthat compete with MDC agricultural products commodities such asbeef certain fruits and vegetables and sugar

Raw tropical products such as cocoa and coffee face few restric-tions because they do not compete with more-developed country pro-duction However semi-processed products such as cocoa paste andcertain fibers such as cotton do face restrictions Developing countrieswould like to export more processed commodities because those prod-ucts have a higher unit value and provide more employment

Quotas and tariffs are two of the more common import restric-tions placed on agricultural commodities by MDCs An example of howan import tariff works to increase price in the country imposing it andto reduce imports from the exporting countries is illustrated in Figure161 The tariff increases the price that domestic consumers must payfor imports which also raises the price they are willing to pay to localproducers as well In Figure 161 the country imposing the tariff is smallin the world market so the tariff does not alter the world price How-ever if is country is large in the world market such as the United Stateswith sugar a tariff (or a quota that would act just like the tariff in itseffects on the market) would depress the world price as well

It is estimated that if the more developed countries removed allbarriers to market access for agricultural products from other coun-tries the world would gain about $44 billion (in 2001 dollars) about a

5 Gross terms of trade do not take into account differences in costs of production be-tween the products However it is difficult to draw a firm conclusion about the netterms of trade because improved technologies have reduced the cost of producingthe exports as well It is possible for the gross terms of trade to decline but the netterms of trade and comparative advantage for agricultural products to improve

339


Figure 161 Effects of an import tariff

quarter of which would accrue to developing countries6 If all tariffsand subsidies were removed by more developed countries the largestindividual country winners would be Brazil Argentina and India

Subsidized agricultural prices in the more developed countriesencourage increased production in those countries while high pricesdiscourage consumption If production exceeds consumption stocksaccumulate unless they are exported at subsidized prices The addi-tional volume of exports can depress world prices making productionelsewhere even less attractive Dairy products and wheat are examplesof subsidized exports of high-income countries Urban consumers indeveloping countries can benefit from these policies at least in the shortrun due to lower prices but farmers in those countries are faced withproduction disincentives and lower incomes These price distortionsthough benefiting MDC farmers are globally inefficient They createconditions for lower growth worldwide One of the purposes of nego-tiations under the auspices of the World Trade Organization (discussedin Chapter 17) is to reduce these trade restrictions

Restrictive Trade Policies at HomeMany developing countries proclaim food self-sufficiency as an objec-tive but employ direct and indirect policies that on net tax farmerssubsidize consumers and increase dependence on food imports Ex-amples of direct policies that influence agricultural trade are export

6 Thomas Hertel and Roman Keeney ldquoWhat is at Stake the Relative Importance ofImport Barriers Export Subsidies and Domestic Supportrdquo in Kym Anderson andWill Martin eds Agricultural Trade Reform and the Doha Development Agenda (Wash-ington DC The World Bank 2005) pp 49ndash52

340


Developed countries protect rice producers at the expense ofproducers in developing countries

taxes and subsidies import tariffs export and import quotas import orexport licenses and government-controlled marketing marginsMultiple and overvalued exchange rates and high rates of industrialprotection are the principal indirect means of discriminating againstagriculture

Agricultural export taxes are one of the oldest and most commontrade interventions in developing countries Export taxes tend to raisethe prices of the products to foreign buyers and reduce the prices re-ceived by domestic producers Producers of cocoa in Ghana cotton inMali coffee in Togo tobacco in Tanzania and tea in India mdash to namejust a few products and countries mdash typically receive much less thanthe border prices for their products Some of this difference is due tomarketing system inadequacies (see Chapter 15) but a significant por-tion is caused by export taxes

Some taxation of export crops involves direct taxation of productsas they move through ports Alternatively public marketing agenciesare established that control marketing margins or set farm prices lowerthan market equilibrium These agencies often called marketing boardsor parastatal marketing agencies were discussed in Chapter 15 Theyare granted monopoly power for buying and selling the commodityand they may set quotas for exports or imports

Export taxes are prevalent in the developing countries because theyare a relatively easy tax to institute and collect compared to alternatives

341

such as income or land taxes Export taxes generate government rev-enues and in some cases reduce exports and encourage the shifting ofproduction from exports to domestic food crops

Occasionally developing countries impose export taxes in attemptsto exploit monopoly power that they believe they hold in world mar-kets If a country is a large enough exporter in the world market toaffect the world price it can use a tax to raise the world price Althoughthe volume of trade would be lower following the imposition of thetax the hope is that additional income is earned at the expense of pur-chasing countries because the price is higher Ghana has used this ra-tionale for its export tax on cocoa Brazil for a tax on coffee andBangladesh for a tax on jute Although some world price increase ispossible the ability of individual developing countries to exploit mo-nopoly power for particular commodities is quite limited Higher pricescreate incentives for increased production in other countries as well asfor the development of substitute products

Developing countries sometimes use export quotas to partially ortotally restrict exports These restrictions force the sale of the productsin domestic markets thereby reducing prices to consumers The resulthowever is to discourage domestic production and to generate profitsfor those holding the quota rights

Import tariffs and quotas are also used on agricultural products indeveloping countries and are commonly employed on industrial prod-ucts as well When an import tariff or quota is imposed on industrialgoods the prices of the goods are raised relative to those of agriculturalgoods creating an indirect tax on agriculture Another significant sourceof indirect taxation is exchange rate misalignments that result from bothmacroeconomic policies and direct industrial protection policies Whenfiscal and monetary policies (see Chapter 18) lead to a higher rate ofinflation at home than abroad the value of the local currency falls Ifgovernments fail to adjust the official exchange rate downward thecurrency becomes overvalued An overshyvalued currency makes exportsfrom a country more expensive and imports into it cheaper Thus fewergoods are exported and more imported The additional supply of agri-cultural products on the domestic market reduces farm and consumerprices Exchange rate overvaluation is common in developing coun-tries and historically has been particularly severe in several Africancountries including Nigeria Ghana and Tanzania

Countries sometimes establish a multiple exchange rate system Withthis system different commodities are traded at different rates For ex-ample the government allows one rate of exchange for a commodity itwants to keep inexpensive in the country and another for a commodity


342

it wants to make expensive Multiple exchange rate systems often dis-criminate against the agricultural sector

Accurately measuring the effect of government policies on theprices received by farmers is difficult in part because governments typi-cally implement many different policies at once The results of researchto compare actual farm level prices with what farmers would have re-ceived under free-trade policies across countries all around the worldare summarized in Table 16-2 The results in the table are averages for75 countries which together account for over 90 percent of the worldrsquospopulation total income and agricultural income Policy effects wereestimated for the major products in each country in each year totalingmore than 70 different products with an average of almost a dozen percountry Not all countries had data for the entire 1955ndash2007 period butthe average number of years covered is 41 per country

The data in Table 16-2 illustrate how governments in Africa Asiaand Latin America imposed heavy taxes on their farmers during the1960s and 1970s In the 1980s a wave of reform known as structuraladjustment led many of these governments to reduce average tax bur-dens by lifting both exchange-rate distortions and direct trade restric-tions Some of these policy changes were imposed by foreign lenders sothat borrowing countries could expand exports and repay their debtsbut many were adopted voluntarily by developing-country govern-ments seeking faster economic growth Changing domestic socioeco-nomic conditions also led to policy change particularly when higherincomes and other trends raised the relative political power of acountryrsquos farmers as opposed to its food consumers and taxpayers

This rising political influence is reflected in Table 16-2 in the switchfrom taxing farmers to subsidizing them in Asia and Latin Americaand in the particularly rapid rise in subsidy rates in the highest-incomecountries of Asia This transition towards farm subsidies is a bit of aparadox in that farmers have greater political influence and more sup-port from government after they are fewer in number and have alreadyescaped extreme poverty The situation may seem unusual but as dis-cussed earlier lobbying is facilitated by smaller numbers and richercountries can afford support easier than poor countries Factors such asbenefits and costs per person help explain why regions differ in theaverage tax or subsidy rates shown in the table7

7 Several recent papers analyze these data including William A Masters and AndresF Garcia ldquoAgricultural Price Distortion and Stabilization Stylized Facts and Hy-pothesis Testsrdquo in Political Economy of Distortions to Agricultural Incentives ed KymAnderson (Washington DC The World Bank 2009)


343


TA

BL

E 1

6-2

A

VE

RA

GE

RA

TE

S o

f G

OV

ER

NM

EN

T T

AX

AT

ION

or

SU

PP

OR

T t

o A

GR

ICU

LT

UR

E in

SE

LE

CT

ED

CO

UN

TR

IES

b

y R

EG

ION

1

95

5 T

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00

7 (

pe

rce

nt

of

un

dis

tort

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ce

s)

19

55-5

919

60-6

419

65-6

919

70-7

419

75-7

919

80-8

419

85-8

919

90-9

419

95-9

920

00-0

420

05-0

7

Afr

ica

-14

-8-1

1-1

5-1

3-8

-1-9

-6-7

-2A

sia

-27

-27

-25

-25

-24

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-9-2

81

25

8L

atin

Am

eric

a-1

1-8

-7-2

1-1

8-1

3-1

14

65

8E

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Cen

tral

Asi

a

13

20

17

18

Wes

tern

Eu

rop

e4

45

76

84

65

67

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26

44

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7U

nit

ed S

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s an

d C

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11

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81

31

91

61

11

71

0A

ust

rali

a an

d N

ew Z

eala

nd

68

10

88

11

94

31

2Ja

pan

39

46

50

47

67

72

11

91

16

12

01

20

74

Dev

elo

pin

g c

ou

ntr

ies

-26

-23

-22

-24

-22

-18

-8-2

69

25

Hig

h-i

nco

me

cou

ntr

ies

22

29

35

25

32

41

53

46

35

32

16

All

co

un

trie

s1

36

02

51

71

81

71

81

5

So

urc

e K

ym

An

der

son

D

isto

rtio

ns

to A

gri

cult

ura

l In

cen

tiv

es

A G

loba

l P

ersp

ecti

ve

19

55

to

20

07

(N

ew Y

ork

an

d W

ash

ing

ton

P

alg

rav

eM

acm

illa

n a

nd

th

e W

orl

d B

ank

20

09)

No

te

Eac

h o

bse

rvat

ion

is

a w

eig

hte

d a

ver

age

amo

ng

co

mm

od

itie

s in

sel

ecte

d c

ou

ntr

ies

wit

h w

eig

hts

bas

ed o

n g

ross

val

ue

of

agri

cul-

tura

l p

rod

uct

ion

at

un

dis

tort

ed p

rice

s

344


Policy changes that influence prices can lead to large responses infarm income and agricultural production The output responses to pricechanges for different commodities in Africa and the rest of the worldare indicated in Table 16-3 Production of individual crops whose areaplanted can vary quickly is more responsive than that of total agricul-tural output but substantial shifts have occurred among commoditiesproduced as prices changed

Heavy taxation of agriculture and trade restrictions constrain ag-ricultural growth By reducing farm incomes they hasten the exodus ofpeople from rural areas creating social costs in urban areas as sewerwater health systems and other infrastructure are stretched to theirlimits Lower incomes in agriculture also reduce farmersrsquo incentives toinvest in land improvements such as irrigation and farm buildings toadopt new technologies and to support rural schools with local re-sources

Arguments against a relatively free trade regime often are basedon anticipated effects of trade on income distribution The basic con-cern is that the benefits of trade may accrue to the wealthiest segmentsof society While there is reason for concern that a disproportionateamount of economic gains from trade might go to the wealthiest his-torical evidence suggests that a high proportion of the benefits fromtrade restrictions also accrues to them Trade restrictions provide a

TABLE 16-3 SUMMARY of OUTPUT RESPONSESto PRICE CHANGES

Percentage change in output with a 10 increase in pricea

Crop African countries Other developing countries

Wheat 31 ndash 65 10 ndash 100Maize 23 ndash 243 10 ndash 30Sorghum 10 ndash 70 10 ndash 30Groundnuts 24 ndash 162 10 ndash 30Cotton 23 ndash 67 10 ndash 162

Tobacco 48 ndash 82 05 ndash 100Cocoa 15 ndash 180 12 ndash 95Coffee 14 ndash 155 08 ndash 100Rubber 14 ndash 94 -04 ndash 40Palm Oil 20 ndash 81 ndash

aThe lower end of the range shows short-term supply responses and the upperend shows long-term responsesSource World Bank World Development Report1986 (New York Oxford University Press 1986) p 68

345


fertile environment for powerful domestic interest groups to pressurefor advantages The benefits of quota rights export and import licensesand subsidized inputs provide economic incentives for people to lobbyfor these privileges Visible corruption often emerges as well It is naiveto assume that governments are simply selfless protectors of social wel-fare They are politicians and civil servants who respond to pressuresfrom private individuals and interest groups

While many government employees act with the overall publicgood in mind they may also be just as concerned with their own self-interest as people are in the private sector Self-interest can encompassmonetary gain re-election promotion or other rewards And even whenthere are no conflicts of public and private interests administrative com-plexities associated with trade restrictions can lead to waste costly timedelays in marketing and other types of inefficiency

Market InstabilityGovernment officials in developing countries often argue that trade re-strictions are needed to counter food insecurity and income risks asso-ciated with international trade Price instability in international com-modity markets is indeed very large but prices would also fluctuatedomestically in the absence of trade

Why are agricultural prices so variable The central reason is thatdemand for most primary commodities is relatively inelastic As weatherchanges and other factors cause supply to shift back and forth againstan inelastic demand curve prices vary substantially for small changesin quantity supplied (see Figure 16-2) A shift back in food supply againstan inelastic demand at a time of low food stocks was responsible for arapid rise in world food prices during 2007ndash08 which in turn led manyfood-surplus countries to restrict exports and food-deficit countries toseek self-sufficiency When trade restrictions are imposed in such a situ-ation however prices in local markets become even more volatile thanworld prices because domestic demand tends to be even more inelasticthan world demand

One way for governments to reduce their countryrsquos vulnerabilityto fluctuations in commodity prices is to diversify by investing in awider range of agricultural products and in other sectors When thesenew enterprises are profitable the result is sustained growth and greaterstability Unfortunately some attempts at diversification impose taxeson successful industries while promoting less successful ones Such pro-motion can reduce growth and worsen instability Both diversificationand stabilization are often most successful when they are driven by newtechnologies and accompanied by marketing improvements These

346


changes can make production of major field crops more stable and canfacilitate introduction of products for which markets are growing suchas such as non-traditional fruits and vegetables Diversification may beassociated with higher levels of exports but less overall exposure tosingle market risks

SUMMARYProponents of trade restrictions argue that as countries become moreintegrated into the world economy they open themselves up for ex-ploitation by more-developed countries Trade proponents of freer tradeargue that it facilitates development and permits more efficient use ofresources It gives countries access to goods and services that otherwisewould be unavailable or more expensive Even well-motivated effortsto restrict trade however often serve merely to benefit the wealthyMost developing countries do trade and also follow some restrictivetrade policies Many developing country exports come from agricul-ture The preponderance of evidence supports the view that a relativelyopen trading environment is more conducive to economic developmentthan a highly restrictive one

Figure 16-2 Small changes in the supply of agricultural productscan result in large changes in price

347


Developing countries have a comparative advantage in severalagricultural products particularly tropical ones They often become lessself-sufficient in food in the middle stages of development Trade tendsto have favorable employment implications

External demand constraints market instability and internal di-rect and indirect trade restrictions all impede exports from and importsinto developing countries Lack of access to developed country mar-kets is probably the most severe external problem Governments im-pose internal trade restrictions to raise revenue to distribute income toparticular groups in response to pressures from interest groups to ex-ploit monopoly power for certain export crops and for reasons of foodsecurity Indirect restrictions such as overvalued exchange rates are oftengreater sources of discrimination against agriculture than are direct re-strictions such as export taxes and quotas

IMPORTANT TERMS and CONCEPTSComparative advantage MercantilismExport taxes Multiple exchange ratesForeign exchange rates Overvalued exchange rateFree Trade ProtectionismImport substitution QuotasInternational commodity agreement TariffsInternational trade Terms of trade

Looking AheadA variety of steps can be taken to enhance international trade The nextchapter considers those steps including the role of regional groupingsof countries multilateral trade negotiations and other changes in do-mestic and international policies

OUESTIONS for DISCUSSION1 Why do countries trade2 Why do some argue that the terms of trade turn against developing

countries over time3 What is comparative advantage4 Has agriculture as a percent of total earnings increased or declined

for developing countries over the past 30 to 40 years5 Why might a countryrsquos comparative advantage for particular

products change over time6 Identify the possible linkages between trade and employment7 What are the major external trade impediments facing developing

countries

348


8 Why is world price instability a problem for developing countries9 What are the major direct and indirect agricultural trade restric-

tions employed by developing countries10 Why do developing countries impose trade restrictions11 Why does as overvalued exchange rate hurt agricultural exports

from a country

RECOMMENDED READINGSAnderson Kym and Will Martin eds Agricultural Trade Reform and the

Doha Development Agenda (Washington DC The World Bank 2005)Colman David and Trevor Young Principles of Agricultural Economics

Markets and Prices in Less Developed Countries (Cambridge CambridgeUniversity Press 1989) Chapter 11

Johnson D Gale World Agriculture in Disarray 2nd ed (New York StMartinrsquos Press 1991)

349

CHAPTER 17

Trade Policies Negotiationsand Agreements

hellipthe WTO at least provides a system of rules for world trade hellip

The rules may not be perfect but they are certainly better than no

rules at all mdash Eugenio Diaz-Bonilla and Sherman Robinson1

THIS CHAPTER1 Explores solutions to internal constraints to trade2 Discusses trade negotiations regional cooperation and other inter-

national solutions to trade problems3 Considers means of reducing price production and income instabil-

ity problems associated with trade

REDUCING INTERNAL BARRIERS to INTERNATIONALTRADEBarriers to expanded international trade in agricultural products areboth self-imposed by developing countries and externally-imposed onthem by protectionist policies in more developed countries We beginby considering what developing countries can do internally to solvetheir trade problems Trade restrictions are imposed within develop-ing countries in attempts to distribute benefits to particular groups togenerate government revenues and to offset economic instability andfood insecurity Removing these restrictions may require institutionalchange to facilitate reform alternative revenue sources to replace tradetaxes that help pay for public services and bridge financing to pay theadjustment costs associated with short-term losses before long-termgains arise

1 Eugenio Diaz-Bonilla and Sherman Robinson ldquoThe WTO can Help Worldrsquos PoorFarmersrdquo International Herald Tribune March 28 2001

350


Institutional Change to Facilitate ReformAs seen in the previous chapter a principal motive for trade restric-tions is to redistribute income within the restricting country transfer-ring real income to one sector at the expense of others Reforming suchpolicies requires a shift in political influence which usually comes fromchanges in social institutions Civic organizations the media legal pro-cedures and administrative practices all help determine whether a par-ticular sector mdash such as sugar refiners or steel producers mdash have thepolitical influence needed to obtain favorable trade restrictions Oftenreforms arise not because favored groups lose some of their power butbecause other groups acquire more influence of their own and use thatto obtain countervailing policies that level the playing field Helpingmore groups acquire some influence often involves lowering transac-tions costs and facilitating access to information among those who arerelatively powerless Doing so can help those individuals engage incollective action (especially informal lobbying and protesting) andthereby pressure the government for more favorable policies

A concerted and sustained effort is often needed to reform poli-cies that benefit powerful groups Transparency and accountability ingovernment facilitated by a free media and an independent judiciaryare often essential to constrain unscrupulous behavior Policy prescrip-tions mentioned in earlier chapters with respect to land tenure envi-ronmental policy price policy and research policy are also relevant fortrade policy

One external means of encouraging internal policy reforms is foran organization such as the World Trade Organization (WTO) to helpcountries enter mutual commitments to favorable policies and for lend-ers such as the International Monetary Fund (IMF) to require trade re-forms as conditions for loans This type of activity is viewed by manyas meddling in the internal affairs of developing countries And to acertain extent it is It certainly places a high burden on an institutionsuch as the WTO or IMF to get its interventions right lest it cause moreharm than good Often however international actors can help a gov-ernment to undertake reforms that are known to be desirable but maynot be politically feasible for them to accomplish without an externalpartner

Alternative Revenue SourcesExport taxes and import tariffs are among the easiest mechanisms forraising government revenues in developing countries They can be re-placed with less-distorting revenue sources such as income taxes prop-erty taxes and value-added taxes but this kind of fiscal reform requires

351

CHAPTER 17 mdash TRADE POLICIES NEGOTIATIONS AND AGREEMENTS

a large increase in record-keeping and accounting information aboutthe domestic transactions to be taxed Converting quantitative restric-tions (quotas) to export taxes or import tariffs as an intermediate stepto their removal while not removing the distortion would at least pro-vide more revenues to the government rather than to private individuals

Foreign debt reduction would reduce the pressure on developingcountry governments to generate revenues The nature of debt prob-lems in these countries and potential solutions are discussed in Chap-ter 18 Most of these solutions require action on the part of both more-and less-developed countries Several developing countries have andwill continue to realign their exchange rates to encourage more exportsBut this solution will be insufficient for most countries without addi-tional assistance from more developed countries

Bridge Financing for Adjustment CostsDeveloping countries often find it difficult to undertake necessary long-term policy reform because the short-term consequences are so severeDevaluation of an overvalued exchange rate raises the cost of importsand reduces the cost of exports While these cost changes improve theforeign-exchange balance and may improve economic efficiency theyalso mean that fewer goods are in the domestic market and that theremay be severe price increases in the short run Food prices may risereal incomes fall and a disproportionate burden may be placed on thepoorest members of society

International organizations can play a role in providing financialassistance to help offset short-term cost-of-adjustment problems associ-ated with policies or structural adjustment programs In fact multilat-eral donors led by the World Bank instituted social funds as a meansof providing some protection to the poor during structural adjustmentprograms2 Since the losers from policy reform can block changes thatwould help many more people in the long run assistance aimed at fa-cilitating adjustment can have significant benefits over time

REMOVING EXTERNAL CONSTRAINTS to INTERNATIONALTRADEThe primary methods that have been suggested as potential solu-tions to external trade constraints include trade negotiations andspecial preferences regional cooperation and product diversification

2 See Carol Graham Safety Nets Politics and the Poor (Washington DC The BrookingsInstitution 1994)

352


Countervailing trade restrictions to offset the external constraints alsohave been suggested but they can generate their own set of problems

Trade Negotiations and Special PreferencesBilateral and multilateral negotiations have provided opportunities forliberalizing external restrictions on developing country trade Bilateralnegotiations occur when one country negotiates preferential trade ar-rangements with a second country either for specific goods or for wholecategories of goods and services For example nation A might grantnation B preferential access to its sugar market mdash that is reduce orremove restrictions to sugar imports from nation B mdash in exchange forspecial access to nation Brsquos wheat market Or nation A a more-developed country might simply grant a special preference to nationB a less-developed country Numerous variations of bilateral trade ne-gotiations and special preferences are found

Since World War II the primary focus for trade negotiations hasbeen multilateral rather than bilateral under the auspices of the Gen-eral Agreement on Tariffs and Trade (GATT) and since 1994 the WorldTrade Organization (WTO) The GATT signed in 1947 replaced a se-ries of bilateral agreements that segmented world trade before the warMore than 100 countries were signatories to the GATT and currentlyabout 150 countries are members of the WTO its successor organiza-tion The GATT and WTO have attempted to foster adherence to theprinciple that countries should not discriminate in the application oftariffs3 Nondiscrimination implies that bilateral preferential agreementsare not allowed The rules allow for exceptions for developing coun-tries Several developed countries maintain preferential trading arrange-ments with particular groups of developing countries for certain cat-egories of products For example the United States instituted a Carib-bean Basin Initiative that eliminated tariffs and quantitative restrictionsfor many agricultural products from Caribbean countries Several coun-tries in West Africa have had special preferences with France Somedeveloping countries have called for more generalized preferences tobe granted to countries with incomes below a particular level

The GATT contained provisions related to consultation and nego-tiation to avoid disputes rules concerning non-tariff as well as tariffbarriers and agreements to periodic multilateral negotiations to lowertrade barriers Over time success in reducing tariff barriers increased

3 Nondiscrimination has been called the most-favored national principle that a coun-try should apply to other countries the same tariff levels that it applies to its most-favored nations

353


the importance of non-tariff barriers Non-tariff influences on trade in-clude but are not limited to certain types of health and safety regula-tions (see Box 17-1) domestic content restrictions complex customsformalities and reporting requirements and rules on intellectual prop-erties

Eight rounds of multilateral trade negotiations took place underthe GATT Most of the early rounds involved negotiations on tariffsand on rules for trading blocs such as the European Community (EC)The middle rounds increasingly focused on non-tariff issues Agricul-tural trade restrictions received relatively little attention until the Uru-guay Round from 1986 to 19944 They are at the heart of the Doha Roundnegotiations under the WTO also called the Development Round

Developing countries have felt that trade negotiations have focusedtoo little on developed country trade restrictions that affect developingcountries Since 1964 they have met periodically under the auspices ofthe United Nations Conference on Trade and Development (UNCTAD)a permanent organization within the United Nations to develop pro-posals for trade arrangements more favorable to developing countriesThese discussions led to calls for a new international economic order(NIEO) The NIEO contains provisions for improved access to

4 Tariff rounds are frequently named after individuals or after locations where theinitial discussions in the in the round take place The Uruguay Round began with ameeting in Punta del Este Uruguay in 1986

BOX 17-1ENVIRONMENTAL HEALTH and SAFETY REGULATIONS

Environmental or health and safety regulations can have a significant ef-fect on trade The United States prohibits the importation of products thathave certain pesticide residues Fresh or frozen beef is prohibited fromcountries that have a history of foot-and-mouth disease Clearly govern-ments are wise to regulate trade in products potentially injurious to publichealth More-developed countries usually have tighter environmental andfood-safety regulations than less-developed countries These regulationsraise the cost of production so that without corresponding restrictions ontrade not only might there be environmental or health threats but devel-oped country producers might be placed at a competitive disadvantageHowever environmental or health and safety restrictions appear some-times to be used arbitrarily to protect the economic health of an industrywhen the true human health hazard is seriously in doubt As a result re-cent multilateral trade negotiations have included tighter rules on whensuch restrictions can be applied

354


developed country markets through a generalized system of trade pref-erences and for a set of mechanisms aimed at reducing price and for-eign exchange earnings instability

Aside from some compensatory financing schemes for stabilizingforeign exchange (discussed below) some specific trade preferencesand a few other measures UNCTAD proposals for a NIEO went largelyunheeded The Uruguay Round of the GATT produced the first seriousattempt to address agricultural trade restrictions including some ofparticular concern to developing countries The reason for finally con-sidering agricultural restrictions had little to do with agricultural de-velopment problems per se By the mid-l980s budget costs shrinkingforeign demand and world surpluses that threatened a global tradewar forced agricultural issues to the top of the GATT agenda The Uru-guay Round negotiations highlighted the divisions among more-de-veloped countries and between more-developed and less-developedcountries with respect to trade policy and also illustrated the diversityof interests among less developed countries Net-exporting developingcountries were very concerned about market access and effects of de-veloped country export subsidies Net-importing developing countrieswhile concerned about market access were also concerned about pos-sible rising prices in world markets particularly for food grains

The Uruguay Round ended with a very modest reduction in tradebarriers but success in reorienting the trade debate in several respectsPrior to the Uruguay round trade in many agricultural products wasunaffected by the tariff cuts that had been made for industrial productsin previous rounds In the Uruguay Round there was agreement toconvert all non-tariff agricultural trade barriers to tariffs These tariffswere subject to bindings that limit countriesrsquo ability to increase themThe round also contributed to a shift in domestic support for agricul-ture away from those policies with the largest potential to affect pro-duction and therefore to affect trade flows Countries accepted com-mitments to reduce expenditures on export subsidies and not to applynew subsidies to unsubsidized commodities Because the base periodschosen had generally high protection the way non-tariff barriers wereconverted to tariffs and the modest percentage reductions agreed tothe overall reduction in trade barriers was small5 However the basewas established to build on in future negotiations

5 Developed countries committed to reducing tariffs by 36 from the levels in the late1980s developing countries 15 The Uruguay Round allowed countries to insti-tute ldquotariff-rate quotasrdquo A tariff-rate quota applies a lower tariff to imports belowa certain quantitative limit (quota) and permits a higher tariff on imported goods

355


The Uruguay Round resulted in separate agreements on (a) sani-tary and phyto-sanitary (SPS) measures to protect humans animalsand plants from foreign pests diseases and contaminants and (b) in-tellectual property rights to protect patents copyrights and other suchrights from infringement abroad Both of these measures have been dif-ficult for developing countries to accept The SPS rules can be creditedwith increasing transparency of countriesrsquo SPS regulations and provid-ing a means for settling disputes Still the rules can be manipulated tosome extent to create barriers to trade that may not be related to SPSconcerns The rules state that science should be the deciding factor as towhether an imported good poses a threat but science can still be de-bated Intellectual property rights are monopoly rights that are grantedto create incentives for private individuals and firms to innovate How-ever they also can lead to companies charging high prices to poor coun-tries for drugs and production inputs

World Trade OrganizationThe WTO was created in 1994 to replace the GATT and strengthen theenforcement of international trade rules and the settling of trade dis-putes For example a single country can no longer block the formationof a dispute resolution panel or veto an adverse ruling by blocking theadoption of a panel report However it can still be difficult to get coun-tries whose practices have been successfully ruled against to changetheir behavior because the only sanction which the WTO can imposewhen a member government is found to have violated its WTO com-mitments is to give to other governments the permission to impose lim-ited specific retaliatory sanctions

The WTO matters mainly as a framework for negotiation Despiteconcerns of developing countries that the WTO is dominated by moredeveloped countries the WTO does give developing countries moresay than they would have outside it It is also more open than the GATTPartly for this reason more developing countries have joined the WTOthan were members of the GATT Because developing countries canvote as a bloc or blocs they can force issues more strongly than beforeFuture negotiations under the WTO are likely to succeed only with someconcessions to developing country concerns In the 2001 meeting inDoha Qatar developed countries agreed to place export subsidies

after the quota has been reached The purpose was to ensure that historical tradelevels could be maintained while creating some new trade opportunities How-ever the effect has been to slow the rate of trade liberalization

Footnote 5 continued

356


higher on the agenda They also agreed to some relief on intellectualproperties such as for drugs to fight AIDS The Doha Round has beencalled the Development Round to indicate international commitmentto addressing concerns of developing countries In the 2003 Ministeriallevel WTO meeting in Cancun Mexico a group of 21 developing coun-tries (which altogether represented about two-thirds of all the worldrsquosfarmers) called for tighter domestic support restrictions for developedcountries and more flexibility for special and differential treatment fordeveloping countries Their strong position was one of the reasons lead-ing to a breakdown of that meeting but it marked a negotiating mile-stone in that for the first time several developing countries negotiatedas a block and were able to affect the outcome

The WTO faces significant obstacles in its role as an internationalforum for trade negotiations Some poor countries fear that developedcountries will use labor standards as a protectionist tool Others areconcerned that little progress will be made to strengthen anti-dumpingrules and to continue to remove protectionist policies on textiles andapparel The Europeans want stronger environmental rules than eitherthe United States or developing countries would like the latter prefer-ring environmental issues to come under separate non-trade agree-ments

Most would argue that the WTO is at least potentially more a friendthan a foe for developing countries It has been estimated that globalfree trade would confer income gains of about $150-200 billion annu-ally to developing countries and reduce the number of extremely poorpeople6 About half of those gains would arise from removing restric-tions (eg tariffs and quotas) on exports from developing-country prod-ucts to developed-country markets especially in agricultural goodstextiles and apparel The gains would be roughly twice the amountthat developing countries currently receive through foreign develop-ment assistance However in the Doha Round negotiations neither de-veloped nor developing countries have sought the degree of trade lib-eralization that would come close to generating this level of benefitsAlmost half of what developing countries could gain from free tradewould come from their own tariff reductions because about a third oftheir exports are to other developing countries and because their tariffsare higher than those of the developed countries7 In July 2008 Doha

6 William Cline Trade Policy and Global Poverty Institute for International Econom-ics Washington DC 2004

7 Kym Anderson and Will Martin eds Agricultural Trade Reform and the Doha Develop-ment Agenda (Washington DC The World Bank 2005) p12

357


Round negotiations broke down over agricultural trade issues espe-cially a dispute over a mechanism that would allow poor countries toinstitute tariff protection for specific products if prices drop too low orthere is a surge in imports As of mid-2009 formal negotiations are stillat an impasse Global recession has hindered the restart of talks as mostcountries find it politically difficult to discuss reducing trade barriersduring economic downturns The future of the Doha Round remainscloudy at this time

Regional Trade AgreementsInternational trading relations are increasingly influenced by regionalorganizations and trading blocs The economic union in Europe andthe North American Free Trade Area (NAFTA) are examples but sotoo are the more loosely integrated free-trade areas that have been es-tablished in the Asian-Pacific countries the Andean countries and theSouthern cone countries in Latin America in Southern Africa and else-where Free trade areas are trading blocs whose member nations agreeto lower or eliminate tariffs and perhaps other trade barriers amongthemselves but each country maintains its own independent tradepolicy toward nonmember nations Free movement of production fac-tors such as labor are usually not included8

One of the recommendations in the NIEO proposed by UNCTADwas for increased collective self-reliance among developing countriesReduced trade restrictions among a group of those countries could al-low for increased specialization economies of scale (particularly formanufacturers) and competition that reduces costs of production andimproves economic efficiency Occasionally a group of countries cangain some market power through closer economic integration How-ever exercise of that power usually creates incentives for one membercountry to undercut another in terms of production or prices The poweris then eroded and the cohesion of the group jeopardized

Regional economic groupings can be helpful to developing coun-tries but their usefulness is limited somewhat by the fact that gainsfrom trade among themselves often are constrained by the similarity ofproducts produced among different countries in a region For this rea-son there has been interest in developing countries to link to more

8 Free movement of factors is allowed in a tighter form of economic integration such asa Common Market or an Economic Federation or Economic Union One type ofregional economic integration that is tighter than a free trade area but looser than aCommon Market is a ldquoCustoms Unionrdquo in which member countries agree to a com-mon trade policy against all outside countries

358


developed countries in these groupings NAFTA is a good examplewith Mexico linked to the United States and Canada Trade liberaliza-tion under NAFTA has been accompanied by substantially larger vol-umes of trade of agricultural commodities among the three countriesNAFTA eliminated many tariffs and quantitative restrictions amongthe participants beginning in 1994 and provides for progressive elimi-nation of tariffs and other trade barriers between the countries over a15-year period Both exports and imports are up in each of the threecountries more than would have been otherwise The result has beengains from trade as well as resource adjustments within individual com-modity sectors Despite these gains extending NAFTA to include firstCentral America and the Caribbean and then all of South America hasbeen controversial Developing and more-developed countries fear forloss of jobs and there is little question that expanded regional tradewould force many adjustment costs Some also fear that the signing ofregional trade agreements will lessen incentives for countries to enterinto meaningful multilateral negotiations at the global level

REDUCING INSTABILITYMany trade policy debates focus on price variability rather than aver-age price levels for traded goods and foreign exchange earnings Someof the main strategies advocated to deal with price risk include diver-sification commodity agreements compensatory financing and en-hanced use of market information

Product DiversificationMany countries that receive a high proportion of their export earningsfrom one or two commodities could likely moderate the effects of ex-ternal trade restrictions by some diversification of exports The termsof trade can turn against any single product as substitutes are devel-oped (eg for jute and sisal) or new technologies shift supply out againsta relatively inelastic and slowly shifting world demand (eg peanuts)Also even if progress is made through negotiations in opening up mar-ket access for commodities such as sugar or cotton or reducing explicitor implicit export subsidies for commodities such as peanuts total re-moval of developed-country policy distortions is unlikely Diversify-ing the production of export and food crops can help not only to reducethe terms-of-trade problems arising from external constraints but mayreduce risks associated with price production and foreign exchangevariability

The difficulty for developing countries is in deciding how muchto diversify away from a commodity for which it has a strong

359


comparative advantage Diversification out of agriculture is a natu-ral consequence of economic development that may eventually increaseexchange-earnings stability but too much diversification within agri-culture can be a costly means of achieving stability

Commodity Agreements and Buffer StocksHistorically a widely-discussed approach to reducing price variabilityfor individual commodities has been to develop international commod-ity agreements Several of these agreements have been concluded overthe past 30 years for commodities such as wheat sugar coffee andcocoa However few of these agreements have been effective for verylong

Some early international commodity agreements like one for wheatthat operated from the late 1940s through the 1960s attempt to restrictvariation in price without influencing the price level Other agreementssuch as those for coffee and sugar have attempted not only to stabilizeprices but also to keep prices high by restricting production throughtrade quotas However when production varies these quotas can actu-ally serve to destabilize world prices A third type of commodity agree-ment involves buffer stocks With a buffer-stock scheme when suppliesare high the commodity is bought up and stored These buffer stocksare intended to provide protection against a time when supply of thecommodity drops for some reason If there is a shortage stocks wouldbe released on the market to keep prices down The agreement might

An international agreement was in effect for coffee several years ago

360


specify a minimum and a maximum price a buffer stock of say 15 per-cent of world production a tax on imports or exports to build up thestocks and perhaps some quotas for producing countries

With most commodity agreements exporters and importers havedifficulty agreeing on an appropriate target price range The agreementsalso have proven expensive to administer especially buffer-stock pro-grams with their high costs of storage

Compensatory Financing SchemesSchemes aimed at stabilizing expenditures or earnings are an increas-ingly popular alternative to direct intervention in commodity marketsThe simplest approach has been compensatory financing schemes (CFS)as illustrated in Figure 17-1 A reference line is set for each country forits total export earnings or earnings from particular commodities Up-per and lower acceptable bounds are set around the reference line Whenearnings go below the lower bound the CFS fills in the shortfall byproviding cash or credit to the particular country When earnings are inexcess of the upper bound developing countries may pay back whatwas previously taken out If the repayments shown by shaded regionsabove the top line exactly equal the borrowing shown by shaded re-gions below the bottom line plus interest then the CFS would exactlybreak even over time Of course it is nearly impossible to set referencelines at these break-even levels Commodity price trends are unpre-dictable and participating governments have a strong incentive to lobbyfor a more favorable choice of reference lines

Figure 171 Example of a compensatory finance scheme

361


Although CFS programs rarely break even they have been widelyused by donor agencies to help developing countries For example oneCFS operated by the Compensatory Financing Facility (CFF) of the IMFwas established in 1963 to provide financial assistance to member coun-tries experiencing temporary export shortfalls To use the CFF the IMFmust be convinced that the country will seek means to correct its bal-ance of payments problem in the case that export earnings shortfallsare caused by structural problems Countries also can borrow againstthe CFF when adverse weather and other circumstances beyond theircontrol result in high cereal import costs This component of the CFFcalled the cereal import facility was set up in 1981 but has been rela-tively little used

A second important compensatory finance scheme was theSTABEX run by the European Community (EC) as part of the LomeacuteConvention9 The STABEX scheme was restricted to African Caribbeanand Pacific countries and was aimed at stabilizing export earnings for48 agricultural products Usually only exports to the EC were coveredA reference line was set for each commodity based on the average valueof exports for the products in the preceding four years To qualify forcompensation export earnings had to fall at least 65 percent below thereference line All loans were interest free and the least-developed coun-tries repaid nothing The major commodities supported were cottonsisal coffee cocoa and peanuts Major beneficiaries were SenegalSudan Cote drsquoIvoire Mauritania and Tanzania

Enhanced Use of Market Information Insurance andDerivativesThe difficulty of implementing any of the stabilization approaches dis-cussed above has led to the development of new more market-basedinterventions At the simplest level governments seek to increase theflow of market information to facilitate commodity trading and stor-age Governments can also help traders use well-regulated futures andoptions markets These contracts are called derivatives because theyrepresent the right to buy or sell something else they are derived fromthe commodity but are not the product itself Important derivative

9 The ECrsquos economic arrangement with African Caribbean and Pacific countries whichreplaced former colonial preference schemes was originally spelled out in the LomeacuteConvention of 1975 and revised several times before being itself replaced by theCotonou Agreement of 2000 Other arrangements include free access for many Af-rican Caribbean and Pacific products to EC markets and the European Develop-ment Fund which administers foreign aid to these countries

362

markets exist in London New York Sydney and elsewhere the largestfutures market lsquolsquoexchangerdquo is in Chicago With futures markets com-modities can be bought and sold for delivery at a future date Farmersor exporters can fix a price for goods to be sold later thus reducing therisk This activity is called hedging Alternatively sellers can insureagainst extremely low prices and buyers against extremely high pricesby trading in options on futures contracts Farmers or exporters caninsure against low prices by purchasing an option to sell if prices fall toa specified level If prices fall below that level they can exercise theiroption to sell at that price If prices rise above it they lose what waspaid for the option but they can sell the products for the higher price

The usefulness of international futures and options markets is lim-ited for developing countries because internal commodity prices maynot follow the same pattern as commodity prices in Chicago New Yorketc However if trade becomes more liberalized in the future thesemarkets may become more useful

SUMMARYExternal demand constraints market instability and internal direct andindirect trade restrictions all impede exports from and imports into de-veloping countries Lack of access to developed-country markets is prob-ably the most severe external problem Governments impose internaltrade restrictions to raise revenue to distribute income to particulargroups in response to pressures from interest groups to exploit mo-nopoly power for certain export crops and for reasons of food securityIndirect restrictions such as overvalued exchange rates are often moresignificant sources of discrimination against agriculture than are directrestrictions such as export taxes and quotas

Trade negotiations were undertaken under the GATT beginningin 1947 but only recently addressed in any substantial way the restric-tions on agrishycultural products that are so important to developing coun-tries The WTO was formed during the Uruguay Round of negotiationsto replace the GATT and currently has roughly 150 countries as mem-bers Developing countries have more say in the WTO then they hadunder GATT Regional economic groupings of countries such as NAFTAhave also become more prevalent and have increased regional tradealthough their effects on total trade are less certain International com-modity agreements compensatory financing product diversificationand enhanced use of market information may help developing coun-tries deal with economic instability


363


IMPORTANT TERMS and CONCEPTSCompensatory finance Product diversificationDoha Round ProtectionismFree trade area QuotasGATT TariffsInternational commodity agreement Terms of tradeInternational trade Trade preferencesMulti-lateral trade negotiations Uruguay RoundNAFTA World Trade Organization (WTO)

LOOKING AHEADThe macroeconomic environment strongly influences agricultural pro-duction incentives agricultural trade and employment Domestic mac-roeconomic policies affect key prices in the economy including exchangerates interest rates wages food prices and land prices Governmentrevenues taxation borrowing and inflation all influence agricultureIn the next chapter we will consider the effects of both domestic macro-economic policies and the world macroeconomic relationships Particu-lar attention is devoted to world capital markets and the debt crisisfacing many developing countries today

OUESTIONS for DISCUSSION1 Why do developing countries impose trade restrictions2 What is the GATT and why have developing countries felt that it

has focused too little on their problems3 What is the WTO and why was it created4 What is the difference between multi-lateral and bi-lateral trade

negotiations5 What are components of the new international economic order

(NIEO) called for by developing countries under UNCTAD6 What is the purpose of a compensatory finance scheme and how

might one work7 Why might product diversification be helpful to developing coun-

tries8 What is a free trade area Give an example9 How do buffer stocks relate in international commodity agree-

ments10 How might enhanced information help reduce internal trade

restrictions in LDCs11 Why does as overvalued exchange rate hurt agricultural exports

from a country

364



Doha Development Agenda (Washington DC The World Bank 2005)Cline William Trade Policy and Global Poverty (Washington DC Institute

for International Economics 2004)

365

CHAPTER 18

Macroeconomic Policies andAgricultural Development

In the long run macroeconomic forces are too pervasive and toopowerful for micro-sectoral strategies to overcome When they workat cross-purposes as they do in many developing countries anunfavorable macroeconomic environment will ultimately erode eventhe best plans for consumption production or marketing


THIS CHAPTER1 Discusses the importance of government policies associated with

taxation spending borrowing interest rates wage rates the moneysupply and exchange rates in influencing the performance of theagricultural sector

2 Examines why governments in less-developed countries tend topursue specific types of macroeconomic policies

3 Describes the significance of the inter-relationships among macro-economic policies across countries international capital labor andproduct markets and domestic agricultural markets

MACROECONOMIC POLICIES and AGRICULTUREMacroeconomic policies have a strong influence on output prices fac-tor prices marketing margins and hence on incentives for agricul-tural producers consumers and marketing agents Foreign exchangerates for example affect export and import prices and quantities andthus output and input prices Interest rates determine the cost of in-vestments in machinery and equipment and when combined with wage

1 C Peter Timmer Walter P Falcon and Scott R Pearson Food Policy Analysis (Balti-more Johns Hopkins University Press 1983) p 215 This chapter updates ideas inFood Policy Analysis especially in the first section

366


rates the capital intensity of production Interest rates also influencethe cost of storage

The macroeconomic environment conditions the rate and struc-ture of agricultural and urban-industrial growth Job creation and in-come growth and distribution are as much a function of macroeconomicpolicies as are policies and projects targeted at specific sectors The short-run effects of macro policies on employment and income distributioncan be quite different from their long-term effects Real incomes of ur-ban consumers can be sharply reduced in the wake of macroeconomicpolicy adjustments aimed at reducing public debt or controlling infla-tion Policymakers often seek means of softening short-run income andnutritional consequences of policy changes needed for long-termgrowth

Understanding the effects of macroeconomic variables on food andagriculture is important for designing economically and politically vi-able short-and long-run policies When macro policies create distor-tions such as overshyvalued exchange rates heavily subsidized interestrates and inflationary fiscal and monetary policies agriculture is usu-ally discriminated against and long-term prospects for developmentare compromised Pressures build for major macro-policy reforms thateven if unintentionally usually help the rural sector by increasing farmincomes and rural employment Price increases and lower subsidieshowever necessitate painful adjustments by urban consumers Thepervasive nature of these macro-policy effects makes it imperative forthose interested in agricultural development to understand how themacro-economy works

Describing a Macro-economyThe ldquomacro-economyrdquo is the aggregate of all economic activity in thecountry It is the sum of all individual goods and services at the pre-vailing ldquomacro pricesrdquo for foreign currency capital and labor that cutacross all sectors The value of the activity at current exchange ratesinterest rates and wage rates can be added up in terms of demandsupply or income (see Figure 18-1) A countryrsquos gross domestic prod-uct (GDP) a measure of its domestically produced national incomewill in theory be identical regardless of whether it is calculated bysumming demands supplies or incomes In practice differences in mea-surement errors lead to different measures of income depending onthe adding-up technique used Macroeconomic policies in developedcountries often focus on managing the demand side of the economyGovernments implement policies to stimulate private consumption orinvestment use public expenditures to create demand and closely

367

CHAPTER 18 mdash MACROECONOMIC POLICIES AND AGRICULTURAL DEVELOPMENT

manage trade Policies in developing countries frequently are more con-cerned with managing aggregate supply Governments in developingcountries tend to use the types of policies described in Chapter 15 tomanage agricultural supply similar policies affect the other produc-tive sectors Numerous developing countries have attempted to stimu-late supply by involving the government directly in the production ofgoods and services

Demand equals supply when the components in Figure 18-1 areexpressed in real terms (inflation is netted out) The basic factors ofproduction (land labor and capital) together with management earnincomes when they produce goods and services These incomes are spenton the components of aggregate demand hence total income equalsGDP Developing countries are often very concerned about the distri-bution of total income among wages interest rents and profits andundertake policies to manage this distribution

The prices of goods and services are generally expressed in thecountryrsquos currency units The monetary value of a good or service canchange due to inflation even when its real value has not changed Poli-cies that create inflation can change real values as well though oftenindirectly The causes of inflation are discussed below but many ofinflationrsquos effects are in a sense unintended results of fiscal and mon-etary policies We turn our attention to these policies first highlightingtheir effects on agriculture Then we consider the effects of macro-pricepolicies particularly those policies related to exchange rates interestrates and wage rates Finally we consider the effects of macro policies

Demand Description Supply Description Income Description

Consumption Agricultural production Wages+ + +

Private investment Industrial production Interest+ + +

Government expenditures Production of services Rents+ + +

Excess of exports over imports Government production Profitsi i i

Gross domestic product Gross domestic product Gross domestic product+

Net income transfers abroadi

Gross National Product (GNP)

Figure 18-1 Three descriptions of a macro-economy

368


on rural-urban terms of trade and land prices The major macroeco-nomic and agricultural policy connections are summarized in Figure18-2 these connections are described below

Fiscal and Monetary PolicyFiscal policy is the use of taxes and spending by government to influ-ence employment income growth and distribution and other objec-tives Monetary policy is the use of the money supply and the interestrate to influence these things The two kinds of policy are closely re-lated In particular since the government can print money and nevergoes bankrupt expanding the money supply or borrowing from for-eigners can be tempting alternatives to raising taxes Governments dif-fer substantially in their ability and willingness to run budget deficitsand in the way these deficits are financed

Governments in developing countries often go into debt becauseof their many pressing needs and limited tax revenues Tax collectionparticularly income tax collection is difficult and costly and taxes areeasy to evade in countries with poor information systems Consequently

Figure 18-2 Major connections between macroeconomic policy and foodpolicy (Source Based on Fig 5-1 in C Peter Timmer Walter P Falcon andScott R Pearson Food Policy Analysis (Baltimore Johns Hopkins UniversityPress 1983) p 223)

369


developing countries raise large proportions of their tax revenues fromexport taxes import tariffs and sales taxes as these taxes tend to beeasier to collect than others

Because agriculture is usually the largest sector in the economy indeveloping countries it generally provides more revenue to the gov-ernment than it receives in return in the form of government programsHowever there are usually substantial budget allocations to the agri-cultural sector Programs for producers include items such as irrigationsystems roads agricultural research and extension market informa-tion and certain output or input subsidies Programs for consumersinclude items such as targeted and non-targeted food price subsidiesMany of the investments in agricultural research and extension irriga-tion roads etc also benefit consumers

Foreign aid can ease some of these revenue needs as discussedChapter 19 A few countries have petroleum and other mineral resourcesthat they can export so that foreign consumers help provide revenuesfor government spending However given the limitations to raisingtaxes obtaining foreign aid or exporting petroleum or minerals mostdeveloping countries incur budget deficits They meet these deficits byborrowing often from abroad or by increasing the money supply (thatis by printing more money)

Currently several developing countries are heavily burdened bydebts incurred through previous borrowing abroad This debt prob-lem its causes effects and potential solutions to it are discussed laterin the chapter The debt incurred in previous borrowing constrains theability of many countries to take on additional debt Consequentlydomestic money supply and budget finance policies become that muchmore important The size of the money supply must match the needsfor operating capital in the productive sectors of the economy How-ever when a country prints money to finance a large budget deficitinflation is the usual result (see Box 18-1)

Inflation can be linked to increases in particular prices for exampleif a country devalues its exchange rate so the prices of all traded goodsrise or it keeps a fixed exchange rate and sees foreign prices rise But insuch cases the rising prices of those items translate into economy-wideinflation only if the whole money supply rises accordingly Otherwisethe prices of other things would fall and only relative prices wouldchange

Whatever its source inflation does not usually imply a change inall prices by the same amount and so it creates some winners and somelosers Indeed it often hurts agriculture because the prices of inputsusually rise by more than the prices of farm outputs When inflation

370


occurs the foreign exchange rate should change to reflect the reducedvalue of the currency Many developing countries do not allow thisadjustment to take place completely The resulting overvalued exchangerate increases the price of agricultural exports (thus reducing exportdemand) and makes food imports cheaper The resulting increased sup-ply of agricultural products on the domestic market reduces farm prod-uct prices The foreign exchange rate policy is just one of the macro-price policies that have significant impacts on agriculture

Macro Prices and AgricultureGovernments use macroeconomic policies to influence inflation pro-vide incentives and distribute income Three prices mdash foreign exchangerates interest rates and wage rates mdash have major effects on the macro-economy and can be manipulated by the government These macro-prices

BOX 18-1EFFECT on INFLATION of a GOVERNMENT BUDGET DEFICIT

FINANCED by EXPANDING the MONEY SUPPLYInflation is a sustained rise in the general price level for a countryrsquos goodsand services It is usually measured by a price index The following ex-ample illustrates why expansion of the money supply to finance govern-ment budget deficits creates inflation The aggregate supply of goods andservices produced must equal the aggregate demand from total expendi-tures or Y = P x Q = C + I + G + X ndash M where

Y = monetary value of national output or incomeP = price index for all goods and services producedQ = quantity index for all goods and services producedC = national consumption expenditures in private sectorI = national investment expenditures in private sectorG = government expenditures on consumption and investmentX = total value of exportsM = total value of imports

If government demand for goods and services (G) increases becausethe government prints money to pay for a budget deficit either the quantityproduced of goods and services (Q) must increase imports (M) must in-crease or prices (P) will rise Most developing countries do not have enoughidle resources to meet this demand with enough Q Changes in importsrequire foreign exchange Thus the usual result is an increase in prices

Source C Peter Timmer Walter P Falcon and Scott R Pearson Food Policy

Analysis (Baltimore Johns Hopkins University Press 1983) pp 227ndash28

371


are all in fact determined by supply and demand conditions in theirrespective markets so that if the government decides to set them byfiat conditions of excess supply or demand can result Two of theseprices interest rates and wage rates signal the scarcity of basic factorsof production capital and labor Governments often are tempted to setwage rates artificially high to directly raise incomes of workers Theyare tempted to set interest rates low to encourage borrowing and in-vestment Wages set above the free market equilibrium value deter-mined by supply and demand conditions will lead to excess supply oflabor and hence unemployment Interest rates set below equilibriumvalues will create excess demand for credit which will then have to berationed Government policy can be used to affect those macro pricesindirectly by intervening to change the underlying supply andor de-mand conditions Public works projects for example stimulate demandfor labor and could be used to raise wages

The foreign exchange rate is relatively easy to control and gov-ernments often do control it Two other prices with major effects on themacro-economy food prices and land prices are influenced indirectlythrough exchange rate manipulations These prices can also be affecteddirectly by imposing tariffs or by government interventions in theirrespective markets

Exchange Rates An exchange rate is the number of units of onecurrency that it takes to buy a unit of another currency or the price ofone currency in terms of another For many relatively developed coun-tries the foreign exchange rate is determined in international moneymarkets by the supply of and demand for a countryrsquos currency Forexample there is a demand for US dollars in Japan in order to pay foragricultural products imported from the United States Similarly thereis a supply of dollars in Japan coming from the purchase of Japanesecars by US consumers The balance of payments of any country sum-marizes all economic transactions between it and the rest of the worldThe current account largely reflecting trade balances in goods and ser-vices is balanced by the capital account which reflects changes in own-ership of assets between countries A country with a trade deficit (ie itcurrently imports more than it exports) by the nature of the accountingrelationship must run a capital account surplus (ie it is selling moreof its assets) to foreign investors Thus the supply of and demand fordollars are affected by international trade and capital flows for invest-ment or other purposes

These same supply and demand factors exist in developing coun-tries but the exchange rates in these countries frequently are set bygovernments rather than determined in currency markets A developing

372


country may fix or ldquopegrdquo the value of its currency to that of a majortrading partner such as the United States For example Honduras formany years fixed its currency the Lempira to the dollar at a rate of 2Lempira equals 1 dollar The Lempira then followed the fate of the dol-lar in foreign exchange markets It declined in value when the dollardeclined against third countries and rose when the dollar rose

A government can set a new official exchange rate to raise or lowerthe value of its currency For example Honduras eventually devaluedits currency relative to the dollar and set it at a ratio of 4 to 1 Thisdevaluation made imports into Honduras more expensive and its ex-ports cheaper In recent years countries as diverse as Thailand Indo-nesia South Korea Russia Brazil Argentina and Turkey have usedpegged exchange rates at least for a period of time In some cases suchas Ecuador the country has even done away with its currency and justused the dollar in its place In other cases countries have used what iscalled a crawling or soft peg where the currency is allowed to shift gradu-ally over time or move within a pre-specified range with respect to an-other currency

Many countries overvalue their exchange rates for long periods oftime Overvalued exchange rates usually result from differences in in-flation rates between a country and its major trading partners Domes-tic inflation in the presence of fixed exchange rates means that importsseem cheaper relative to domestically produced goods At the sametime exports from the country become more expensive abroad But themarket for foreign exchange in the country will not balance unless capitalflows in thus the value of the currency is driven up Any policy thatcreates inflationary pressures such as government budget deficits orexpansion of the money supply will when combined with fixed ex-change rates lead to overvaluation Countries maintain overshyvaluedexchange rates by controlling the movement of foreign exchange andforeign investment (see Box 18-2)

Countries overvalue exchange rates in part to keep domestic pricesdown More imports and fewer exports mean more goods in the do-mestic market The greater the domestic supply of goods relative todemand the lower the price The result of an overvaluation is that theprices of traded goods produced in the country such as many agricul-tural goods are depressed relative to those of non-traded goods andservices Thus rural incomes tend to be lowered compared to urbanincomes

Devaluation can correct the problem at least temporarily but un-less fiscal and monetary policies are changed to reduce either govern-ment expenditures or aggregate demand inflation will rather quickly

373


result in a reoccurrence of the overvalued exchange rate Devaluationcan also cause hardship on those who produce non-tradable goods andservices and consume tradable goods for example civil servants andcertain groups of factory workers Food prices generally rise in responseto currency devaluation helping farmers and hurting urban consum-ers Policies are often needed to protect the welfare of the very poorwhen a devaluation occurs especially if the currency has been allowedto become substantially overvalued and a large adjustment is needed

Over time countries that are open to international capital flowshave found that either a fixed exchange rate or a flexible exchange ratethat is allowed to float against other currencies is more sustainable thanan exchange rate that is managed by the government so it adjusts gradu-ally Countries with a history of sharp monetary instability or that areclosely tied in trade and capital flows to another country seem to bethe ones who choose the fixed rate system

Interest Rates The price of capital investment is represented bythe interest rate The interest rate reflects in part the productivity ofcapital or the opportunity cost of using capital for one purpose ratherthan another Interest rates also reflect risk and the value of current asopposed to future consumption Interest rates are determined by theinteraction of the supply of investment funds basically household sav-ings and the demand for these funds

Governments can influence interest rates by setting them for pub-lic credit sources and by imposing regulations such as reserve require-ments on private financial sources In addition the method by which

BOX 18-2HOW a GOVERNMENT MAINTAINS

an OVERVALUED EXCHANGE RATESince supply and demand factors determine exchange rates if a govern-ment wishes to fix the official rate at a level other than its equilibrium thenit must intervene in the foreign exchange market It can support an over-valued rate by selling foreign exchange reserves (dollars or some othercurrency) and purchasing its own currency thus supporting its value Over-valuation thus diminishes foreign reserves and cannot be sustained forlong periods of time In the absence of significant reserves a governmentcan restrict access to foreign currency at the official rate and thus effec-tively ration the commodity (foreign exchange) for which excess demandexists This rationing is usually implemented by imposing direct currencycontrols by controlled allocations of foreign exchange to preferred import-ers and by tariffs and other barriers to imports

374


the government finances a fiscal deficit affects interest rates If a deficitis financed by domestic borrowing then interest rates may rise in re-sponse to the increased demand for funds The alternative means offinancing deficits is to print money a policy which is inflationary Thushigher interest rates in the presence of budget deficits can help keepinflation down Macroeconomic policy with respect to interest rates oftenrepresents an attempt to balance the value of capital in increasing pro-duction with the valuation of future relative to current consumption

Governments may set a maximum interest rate that can be chargedby lenders in the country If the rate is set too low excess demand forcredit is created because demand for credit will exceed its supply Un-der these circumstances credit has to be rationed to borrowers who arefortunate to have access to the funds and private lenders will haveincentives not to lend or to circumvent the regulations Formal lendinginstitutions may be forced out of business Moneylenders and otherinformal credit sources not under the control of the government find iteasier to charge higher rates

When interest rates are controlled they may even be set below theinflation rate When this happens the real interest rate is in fact nega-tive2 Negative real interest rates create credit crises since they spurdemand for borrowing far above the supply of savings Even less ex-treme interventions can have negative effects however as they encour-age use of government credit for those who can obtain it and drive outprivate credit institutions

Wage Rates The primary source of income for most people in theworld is returns to their labor Hence creating jobs at decent wages isessential to reductions in poverty and hunger Governments recognizethe importance of labor remuneration and often set minimum wages inan attempt to raise people out of poverty Unfortunately in low-income countries where most people are self-employed minimum-wagelegislation is a relatively impotent tool for raising returns to labor andcan have unintended effects that hurt labor

Labor markets are complex because they are segmented by skilllevels occupations and locations In rural areas labor arrangementsmay include payment in kind (eg food or other goods) may involveconditional access to a piece of land or may depend on other specialrelationships between employers and workers that are determined bylocal customs or institutions Wages for unskilled workers in these ar-eas may be close to the average product of labor rather than the mar-

2 The real interest rate is equal to the nominal interest rate minus the rate of inflation

375


ginal product (Chapter 6) This level in turn is close to a basic subsis-tence level Minimum-wage legislation is virtually unenforceable in ruralareas in developing countries

In urban areas minimum wage legislation has been successful inlarge industries and government organizations People who are able toobtain jobs at or above the minimum wage clearly benefit Unfortu-nately by raising the price of labor minimum wage legislation reducesthe demand for labor by these industries and organizations Thus un-employment (or excess supply of labor) may result in the short run Inthe long run the industries may adapt more capital-intensive technolo-gies further displacing labor or close their doors and move to a coun-try with lower and more flexible wages The possibility of higher wagesin the formal sector may attract more migrants to the urban area evenif jobs are scarce This influx of migrants will also swell the informalsector Consequently minimum-wage legislation in the formal sectormay over time depress wages in the informal sector In summary wagesare an important macro-price especially to the poor but governmentshave little ability to raise people out of poverty by legislating wage levels

Prices of Agricultural Products and Land Agricultural prices areinfluenced by government interventions in output and input marketsas discussed in Chapters 15 and 16 Price supports input subsidiesexport taxes and so on directly influence the terms of trade betweenthe agricultural and nonagricultural sectors Fiscal and monetary poli-cies and macro-prices however usually have even larger effects on theterms of trade between the sectors than do the more direct price poli-cies For example the agricultural sector produces a high proportion oftradable commodities Thus an overvalued exchange rate that encour-ages imports and discourages exports typically has a strong negativeeffect on the agricultural sector

When macro-policies and prices discriminate against the agricul-tural sector so that agricultural prices are depressed downward pres-sures are placed on land prices as well Incentives are reduced for im-proving the land base or for developing technologies to utilize landmore efficiently

In summary macro-prices reflect basic economic conditions in aneconomy Unless agricultural productivity is increased simply distort-ing these prices through government policies is likely to hinder the de-velopment process and create distributional effects that hurt the ruralpoor

376


WHY GOVERNMENTS PURSUE PARTICULARMACROECONOMIC POLICIESWhy do governments in developing countries often follow macroeco-nomic policies that discriminate against rural producers in favor of ur-ban consumers Why do they sometimes change course and introducestructural adjustment programs that may partially reverse this discrimi-nation Political leadership and individual personalities play an im-portant role at the simplest level governments follow policies that re-spond to the balance of political power within their countries Theydistribute income in particular ways to help certain sectors to correctpast problems such as external debts to reduce inflation and to react tochanging world conditions Because food is a wage good (ie food is ahigh proportion of consumer budgets in developing countries) the in-terests of urban consumers coincide with owners of industrial firmsConsumers view lower-priced food as higher real wages while indus-trialists see it as serving to decrease upward pressure on nominal wagesThus an overvalued exchange rate for example is a tempting quick fixfor stimulating industrial growth distributing income toward politi-cally influential urban consumers and industrialists and reducing in-flationary pressures

The growth stimulus of macroeconomic intervention is often short-lived Discrimination against agriculture reduces agricultural growthand investment and foreign exchange earnings from agricultural ex-ports A severely overshyvalued exchange rate can turn a food exporterinto a food importer Rural opposition to the macro-policies increasesover time inflation worsens due to higher food prices and unemploy-ment grows Then because pressures from urban groups continue gov-ernments may subsidize agricultural inputs raise output prices throughsubsidized market margins for food staples and undertake other mea-sures to reduce prices to consumers In other words they pursue par-tially offsetting policies Governments institute such complex policiesdue to political expediency Urban consumers and industrialists arepotent pressure groups that demand low food prices and relatively morepublic goods for urban compared to rural areas

Transactions Costs and Collective ActionBoth macroeconomic interventions and sectoral policies provide ben-efits to politically-favored groups Individuals may belong to severaldifferent groups and may be simultaneously helped and harmed bydifferent policies The net benefit obtained from policy often calledpolitical rents is rarely clear Macro-policy interventions are par-ticularly difficult to observe Thus governments may provide direct

377


subsidies to agricultural producers that are more than offset by over-valued exchange rates and still appear to be helping farmers Food pricesare kept low in urban areas at least in the short run and urban indus-trialists and civil servants with better information than most farmerspress for the continuation of exchange rate distortions and other formsof protection that benefit the urban sector

Rural and urban households can form coalitions and lobby collec-tively for their interests The policy preferences of politicians and othergovernment officials are affected by the relative strength of these ruraland urban lobby groups The urban lobby is often quite strong becauseit may represent a coalition of households students civil servants mili-tary factions labor unions and industrialists

It is not the sheer size of the urban lobby that gives it power toinfluence policy The rural lobby is even larger in many developingcountries However the urban lobby is much more concentrated geo-graphically and this concentration facilitates its ability to organize Stu-dents are concentrated near universities civil servants in governmentoffices and labor unions and industrialists in a relatively small con-centrated formal sector The military is highly organized If people de-cide to protest rising food prices the costs of organizing and comingtogether for this purpose are relatively small in the urban sector

Because the urban lobby is made up of several relatively small buthomogeneous groups members of these groups see the benefits of or-ganizing collectively to press for their interests Rural interest groupsparticularly small-scale farmers are so dispersed that individual mem-bers often see few benefits to themselves Communication is difficultso that even if collective benefits are perceived the costs of organiza-tion and action are prohibitively high Ironically as development pro-ceeds and the agricultural sector declines in relative and absolute sizeits ability to organize and lobby often increases Also the cost to thegovernment of subsidizing a small agricultural sector is lower than alarger sector Therefore once a country is relatively well-developed itusually reduces its discrimination against agriculture

Sometimes government policies are motivated by corruptionamong politicians and other officials Policy distortion creates gains forcertain groups and some of these gains are appropriated by individu-als in public service as payment for instituting the policies

Historical Factors Structural Adjustment and ExternalForcesA government at any particular point in time is constrained by the ac-cumulated effects of past policy choices interacting with worldwide

378


economic conditions One of the most dramatic examples of historycolliding with external forces involves government debt It is naturalfor developing countries to go into debt to some degree but at the startof the 1980s there was a simultaneous increase in international realinterest rates and decline in world commodity prices that sharply in-creased the difficulty of repayment Many countries particularly in LatinAmerica and in Africa had no choice but to devalue their currenciesand cut consumption expenditures in an effort to generate more for-eign exchange Similarly painful ldquostructural adjustmentrdquo programs wereforced on other countries in the 1990s when their sources of capitalsuddenly disappeared The term structural adjustment is often associ-ated with policies aimed at repaying government debt usually foreigndebt This adjustment typically involves a devaluation of the foreignexchange rate to increase exports and reduce imports a reduction ingovernment spending and increase in tax collection sale of govern-ment assets and the removal of restrictions on economic activity Thedevaluation privatization and various types of liberalization may beneeded because external debts cannot be reduced without earning orsaving foreign exchange Reduced government spending and increasedefficiency in tax collection can bring spending more in line with rev-enues The removal of policy distortions is needed to stimulate eco-nomic growth although growth effects may take several years

Some policy changes are made necessary by changing world eco-nomic conditions A recession in the industrialized countries for ex-ample can reduce the demand for products from developing countriesHigh interest rates elsewhere in the world can exacerbate debt prob-lems for developing countries A shock to the oil market can strain ex-change reserves for countries without petroleum Consequently somepolicy changes are necessitated just to react to these external forces Inthe next section we examine how these world macroeconomic linkagesoccur and how they affect developing countries

WORLD MACROECONOMIC RELATIONSHIPS3

Starting from the end of World War II when there was virtually nointernational capital market the international monetary system hasgrown to the point that transfers of capital between countries dwarf thevalues of international trade in goods Capital flows ensure a close link

3 Parts of this section draw on and update material from G Edward Schuh ldquoThe Chang-ing Context of Food and Agricultural Development Policyrdquo in J Price GittingerJoanne Leslie and Caroline Hoisington eds Food Policy Integrating Supply Distri-bution and Consumption (Baltimore Johns Hopkins University Press 1987) pp 78ndash87

379


between interest rates and exchange rates across countries and heavilyinfluence countriesrsquo trade and their fiscal and monetary policy options

A major change in the structure of the international economy wasthe shift beginning in 1973 from a system of fixed exchange rates to oneof bloc-floating exchange rates With the fixed system currencies aroundthe world were fixed for long periods of time against the dollar4 Withthe bloc-floating system the values of major currencies are allowed tochange rapidly against each other in response to market conditionsSome developing-country currencies however remain fixed to the majorfloating currencies such as the US dollar

Implications of Well-Integrated Capital Markets and Bloc-Floating Exchange RatesA well-integrated international capital market and bloc-floating ex-change rates mean that interest rates capital movements exchange ratesand trade are interconnected They mean that fiscal and monetary poli-cies in each country are tied into a single global macro-economy with acommon core rate of inflation and interest rates For example when theUnited States issues bonds at higher interest rates to pay for a govern-ment budget deficit the capital to buy those bonds comes from a widerange of foreign as well as domestic sources This foreign purchase ofUS bonds increases the demand for dollars driving up the value ofthe dollar It also reduces the capital available for other purposes rais-ing worldwide interest rates The higher interest rate makes it harderfor developing countries to pay off their remaining foreign debt forc-ing them to reduce consumption more than they otherwise would5

The higher value of the dollar also makes US exports more ex-pensive abroad and encourages imports into the United States Devel-oping countries with currencies that are tied to the dollar will also find

4 The fixed exchange-rate system had been established at the Bretton-Woods Confer-ence in 1944 Trade expanded rapidly under this system but the system eventuallybecame unworkable when certain currencies particularly the US dollar becameseriously overvalued and others particularly the German deutschemark and Japa-nese yen became severely undervalued

5 Capital flows can also keep interest rates low in some cases For example in 2005China purchased many US bonds even though interest rates were low whichmeant that the United States did not have to raise interest rates to sell bonds tofinance its budget deficit These low rates kept the demand for home mortgagesand other loans strong stimulated the US economy as people were willing to bor-row and spend and contributed to a bubble in the housing market That bubblesubsequently burst and the housing market collapsed with major recessionary im-plications

380


it harder to export and easier to import Then tradable goods sectorssuch as agriculture in those countries suffer from downward pressureon prices

Governments often try to partially isolate their domestic agricul-tural sectors from changes in international markets but any such isola-tion would mean loss of gains from trade and from access to foreigncapital to facilitate development Consequently developing countriesusually choose to absorb a certain amount of instability in interest ratesexchange rates etc caused by world macroeconomic forces in order tobenefit from international goods and capital markets These countrieshowever may need to (1) protect the poorest of the poor through tar-geted food subsidies or other means of ensuring basic food securityand (2) take full advantage of international schemes aimed at stabiliz-ing foreign exchange such as the compensatory finance arrangementsdiscussed in Chapter 17 The IMF does play a role in trying to helpstabilize LDC economies during times of financial crises In a sense theIMF is the closest thing the world has to an international central bankHowever the relatively small resource base of that institution and lackof explicit mandate keeps its role circumscribed as discussed below

Changes in International Comparative and CompetitiveAdvantageComparative advantage increasingly is less influenced by physical re-source endowments and more by human capital endowments Gov-ernment spending on education and agricultural research and the rapidinternational diffusion of certain technologies particularly biotechnol-ogy has the potential to influence human capital accumulation in manydeveloping countries by improving education nutrition and incomesThese changes may eventually lead to restructured trade patterns

Government macroeconomic and sectoral protectionist policieshowever can suppress underlying comparative advantage and distorta national economy away from what the physical and human resourcebase would seem to dictate As exchange rates swing so too does com-petitive advantage in directions discussed previously For example along decline in the value of the US dollar can mislead US producersand producers in other countries about their long-term ability to com-pete A sustained rise in the value of the dollar can send opposite butstill misleading signals These movements can be induced by US andforeign government macroeconomic policies that do not reflect anychanges in fundamental comparative advantage

381


The External Debt Problem Causes Effects and PotentialSolutionsIt is natural for the governments of developing countries to borrow tofinance productive investment As long as a country has investmentopportunities in the public or private sector that yield returns comfort-ably above the cost of funds in the world market then such invest-ments should be made even if external borrowing is required The coun-try will grow more rapidly and can export to repay the loan in the fu-ture A country may also borrow at times to finance consumption apolicy that would be appropriate for example if a natural disaster or ashort-run economic shock such as a sharp oil-price change makes itreasonable to sustain consumption even though current income is lower

Borrowing is imprudent however when the debt is increased tocover longer-run consumption questionable investments large gov-ernment deficits or capital flight out of the country6 Imprudent large-scale borrowing by the government occurred in many developing coun-tries during the 1970s particularly in Latin America and Sub-Saharan

The poorest of the poor may need to be protected by targetedfood subsidies during structural adjustment

6 Capital flight occurs when capital leaves a country due to perceived risk at homeCapital flight however is difficult to distinguish from normal capital flows It of-ten occurs when the government borrows foreign exchange and makes it availableto residents at a subsidized price People acquire this foreign exchange if they canand move it to banks or other investments abroad

382


Africa The result was a debt crisis that began in the early 1980s and hasonly slowly receded over the past three decades When a country has adebt crisis it lacks foreign exchange to make payment of interest andprincipal on its loans

Causes of the Debt Crisis When a country makes more paymentsto the rest of the world than it receives in payments it has a currentaccount deficit (see Box 18-3) It has to sell off assets or borrow to financethe deficit Developing countries began running abnormally large cur-rent account deficits beginning in 1973 when the price of oil skyrock-eted During the 1970s commercial banks received a flood of dollarsfrom the oil-producing countries The banks loaned these dollars todeveloping countries to finance their current account deficits SeveralLatin American and Asian countries seemed to be good risks becausethey had grown rapidly for several years In Africa growth had for themost part not occurred but countries there borrowed from officialsources such as the World Bank for development purposes

By 1980 many developing countries were heavily in debt whichbecame suddenly much harder to repay when worldwide interest ratesrose sharply due to tight monetary policy in the United States and Brit-ain Many of the commercial loans to developing countries had beenmade at adjustable interest rates and borrowers found it hard enoughto pay interest let alone repay principal

Repayment of debt became even harder when a world recessionstruck depressing demands for LDC exports Even the demand for oildeclined resulting in a drying up of money for new loans The firstreaction of countries seriously in debt was to refinance the loans andspread them out over a longer period of time Several countries how-ever found it difficult to service their debts (make scheduled interestand principal payments) or to acquire new funds For Latin Americadebt servicing exceeded 50 percent of the value of the regionrsquos exportsduring the early 1980s and much of the debt was owed on short-termloans at variable interest rates that were rising

The first of the large debtors to announce it could no longer ser-vice its debts was Mexico in 1982 Mexico was a net oil exporter but ithad borrowed heavily against anticipated future oil revenues Theseoil revenues declined with the worldwide recession and Mexico wasleft with a debt of more than $80 billion with few exports to make re-payments Banks and the US government provided Mexico with newloans to forestall the repayment problem but it was then clear that theworld community had a major financial crisis on its hands that wouldhave to be addressed As Mexico renegotiated its loans the crisis hit

383

BOX 18-3CURRENT ACCOUNT DEFICIT

The current account deficit represents the excess of spending on importsand interest payments on the external debt over export revenues In otherwords it equals the trade deficit plus interest payments The current ac-count deficit in a particular year also represents the increase in the netdebt for a country Unless the trade surplus is large enough the mereexistence of an external debt means that interest on that debt will causethe debt to keep growing

other countries as well By 1986 more than 40 countries in Latin AmericaAfrica and elsewhere had encountered severe financial problems Ex-cept for the Philippines countries in Asia largely escaped severe debtproblems

Comparisons of the external debt situation between 1970 and 2006for low income middle-income and several individual countries arepresented in Table 18-1 For developing countries external debts as apercent of GNP were two to three times as great in 1990 as they were in1970ndash1975 By 1989 developing countries owed more than $13 trillionDebt service was running more than $100 billion per year Twelve ofthe 17 countries identified by the World Bank as heavily indebted werein Latin America and the Caribbean Africarsquos debt of more than $110billion was three times the value of all its annual exports Cote drsquoIvoireprovides an example of the severity of the debt problem with a popu-lation of 117 million in 1989 it owed $154 billion or $1300 per citizenin a country with an annual per capita income of $790 Forty-one per-cent of the countryrsquos export receipts were needed just to service thedebt

Since the early 1990s there have been gradual debt reductions inseveral countries especially middle income countries but many othercountries have continued to experience high debt levels Some attemptshave been made to forgive debts of several of the most highly-indebtedleast-developed counties but debt problems have proven persistent Inaddition a number of Latin American and East Asian countries experi-enced other short term financial crises in the 1990s as discussed below

Effects of the Debt Crisis When a country attempts to reduce itsexternal debt domestic consumption must be cut to free up resourcesto produce goods that can be exported to earn foreign currency for debtservice Reductions in import demand are needed to save foreign ex-change Not all of the reduced spending affects traded goods Some of


384


it falls on non-traded goods and services when labor and capital shift tothe production of traded goods for export

Within the country prices of traded goods must rise relative towages and other prices to encourage the production of traded goodsand to discourage domestic consumption Exchange rate devaluationis the typical means of bringing about these adjustments in relativeprices Devaluation however takes time to have the desired effect Thuspolicymakers typically find ways to reduce their imports in the shortterm by means such as imposing tariffs or import quotas Because someof the imports are raw materials or producer inputs economic growthoften is slowed as well

Spending cuts and devaluations are painful since they inherentlyinvolve reductions in real income for the country The cuts usually in-clude reductions in basic social services that help the poor The devalu-ations effectively cut real wages As the currency is devalued the coun-try has to give up more in terms of domestic resources to earn each unitof foreign currency The country is essentially selling its labor and otherresources more cheaply on world markets

Many developing countries had overvalued exchange rates priorto the debt crisis thus adjustments were needed irrespective of the cri-sis The devaluations raised the prices of many agricultural exportablesand importables thus helping the farm sector However the resultinghigher food prices hurt the poor particularly The magnitude of thisdebt-induced hurt is difficult to judge because several of these coun-tries would have had to adjust their economies even without the debtcrisis But there is little doubt that the poor in developing countrieshave shouldered a large burden in adjusting to the crisis

TABLE 18-1 INDICATORS OF EXTERNAL DEBTfor DEVELOPING COUNTRIES

Country Total external debtor country group as a percent of gross national income

1970-1975 1980 1990 2000 2006

Low income 102 164 41 563 316Middle income 186 319 399 365 252Argentina 201 484 617 56 586Brazil 163 312 251 39 187Morocco 186 533 971 49 287Philippines 207 538 693 64 471

Source World Bank World Development Indicators Online Database

385


Cuts in government spending have also induced recessions thatreduced government revenues When countries can no longer borrowenough abroad to meet shortfalls they often print money Printingmoney usually increases inflation Devaluation and import restrictionscontribute to these inflationary tendencies They also hurt markets forUS farm products

At the time the debt crisis first hit there was a major concern overthe impending peril to the world financial system The fear was thatsuch countries as Mexico Brazil and Argentina would default on theirloans causing large commercial banks to go bankrupt The threat to thebanking community eventually receded as threatened banks reducedtheir outstanding claims on developing countries and increased therevenues they set aside to guard against disruptions in debt service

The threat to the poor in developing countries however has onlyreceded slowly and in many countries not at all In parts of LatinAmerica and the Caribbean real wages have gradually increased butnot in all countries In Sub-Saharan Africa per-capita incomes havecontinued to stagnate Governments in many developing countries havecut their education and health budgets Not all of these declines weredue to debt problems but many were The rise in poverty and the re-duction in social services have led to increased hunger and malnutri-tion in some countries Environmental problems have increased as wellas countries exploit resources to meet current food and foreign exchangeneeds

Solutions to Debt Problems External debt problems of develop-ing countries impose costs on both debtors and creditors One potentialsolution is for developing countries to default on the loans Total de-fault would have the advantage of relieving pressures to cut govern-ment spending and to export more to service the debt The disadvan-tages are that the creditors could seize debtorrsquos overseas assets andcreditors might seize payments to firms that attempt to export to thedebtor and payments made by firms that attempt to import from itThus the country would lose some potential gains from trade In addi-tion the country would be less able to borrow again for several yearsThis combination of disadvantages has meant that few countries havetotally defaulted on their loans although some countries have stoppedpayments or made only partial payments for a period of time (eg PeruBrazil)

When considering solutions to debt problems it is important toseparate the two different groups of countries whose governments havelarge debt problems One group consists primarily of low-income

386

mostly African countries that owe money largely to governments or tomultilateral lending agencies The second group is composed of theheavily indebted countries primarily in Latin America that owe moneymainly to commercial banks

Both groups have high levels of debt but otherwise their circum-stances are different The low-income African countries possess lim-ited domestic resources such as oil or minerals do not own much abroadhave had slow income growth for reasons primarily unrelated to debtand have continued to receive new loans in excess of debt service Thecountries that owe most of their debts to commercial banks by con-trast own more resources (for example Mexico Venezuela Nigeriaand Ecuador have oil reserves) have a great deal of wealth abroad inmany cases and have had economic growth rates substantially reducedby their debt

Because the lowest-income debtors owe mostly to governmentsthe creditor countries can mandate debt relief or restructuring withoutinterfering in private international capital markets Creditors can re-spond to the debt crisis in ways consistent with their humanitarian be-liefs or more likely their overall foreign policy objectives Low-incomedebtor countries can turn to the Paris Club for help in resolving debtissues (see Box 18-4) Because many loans to African countries are atbelow-market interest rates (subsidized) rescheduling these loans byextending the repayment period can significantly reduce the burden tothe debtor Recently partial debt forgiveness for some of the poorestcountries has occurred and more has been pledged The EnhancedHeavily Indebted Poor Country (HIPC) debt relief initiative establishedby the World Bank and IMF in 1996 reduced debt for 28 HIPCs andthe Multilateral Debt Relief Initiative (MDRI) agreed to by G-8 coun-tries in 2005 provided additional debt relief to more HIPCs

The solutions to debt problems for the heavily-indebted countriesthat have primarily commercial debts are different from those for theHIPCs because whatever solution is arrived at must operate within thecontext of international capital markets that include commercial banksAny solution will affect the distribution of the debt burden among debt-ors private creditors and the public in creditor countries

Several potential solutions to the commercial debt problem havebeen proposed and some partially implemented Most proposals in-volve a combination of debt rescheduling and restructuring of economicpolicies within the debtor nations Other proposals include debt-for-equity swaps cash buybacks of debt and debt-for-conservation swapsDebt rescheduling involves extending the repayment period for theloans altering interest rates forgiving part of the principal or some


387


combination of the three Efforts to restructure economic policies in-volve reducing exchange rates to discourage imports and to encourageexports cutting government spending and otherwise liberalizing theeconomy through reduced government intervention in markets andmarketing

Most countriesrsquo debt sells at a discount on a secondary market inwhich the debt can be shifted from bank to bank or to other institu-tions The debt sells at a discount because creditors believe they willnot be repaid in full For example each dollar of Perursquos debt sold forabout 5 cents on the secondary market in 1991 Debtor countries cansometimes buy back part of their debt with cash or by swapping gov-ernment-owned assets (such as stock in publicly owned companies)Buying back the debt seems to make sense because the value of thedebt on the secondary market is only a fraction of the face value of theloan There have been few buybacks and swaps however because coun-tries lack the cash are uneasy about foreign ownership of their assetsand the secondary value goes up when they attempt to buy back thedebt In a few cases for example in Costa Rica outside groups boughtup and eliminated part of the debt in exchange for government assur-ances of protecting rainforests or other natural resources This type ofactivity is called a debt-for-conservation (nature) swap

Rescheduling debts over a longer period of time at a fixed but be-low market interest rate would eventually solve the debt problem be-cause countries could grow out of their debt However no single bankhas an incentive to act alone Debt reduction like domestic bankruptcy

BOX 18-4THE PARIS CLUB

The Paris Club is a forum for negotiations on countriesrsquo debts to govern-ment creditors The Club formed in 1956 in response to Argentine debtdifficulties has no set membership The participants in any Paris Club ne-gotiation are the debtor government and its creditors who traditionally meetunder the chairmanship of a senior French treasury official

All creditors are treated equally in Paris Club rescheduling negotia-tions Debtor countries approaching the Paris Club are usually required toconclude an agreement with the IMF for an IMF loan and an IMF-approvedprogram for restructuring economic policies An example of IMF condi-tions for a structural adjustment program would be reductions in govern-ment spending and fewer restrictions on exports

Source P Krugman and M Obstfeld International Economics (Cambridge Mas-sachusetts Institute of Technology Press 1988) p 596

388

needs an institutional setting to bring it about Even when it is in thecollective interests of the banks to reduce the debt each bank has anincentive to insist on full payment of its own loans If one bank doesgrant a concession to lower the interest rate or principal it becomesmore likely that other banks will collect their loans Hence each bankwaits around for other banks to voluntarily reduce the interest rate orprincipal owed so they can get a ldquofree riderdquo This free-rider problemexists for debt-equity swaps cash buybacks and other proposed solu-tions as well

Third developed countries have been reluctant to play too large arole in debt relief for fear of large budget expenditures While there arestrong humanitarian grounds for debt relief through Paris Club nego-tiations for the poorest countries the arguments carry less weight fordebt relief in Latin America if that relief comes at the expense of foreignassistance to even poorer countries in Africa and Asia Therefore theworld continues to muddle along with only gradual debt reduction

Regardless of the method used to reduce the debts it would beenhanced by lowering trade barriers to developing country exportsThese barriers make it difficult for the countries to acquire foreign ex-change for debt service For this reason the WTO negotiations mayhave a role to play in solving the debt problem

Financial Crises in Latin America and AsiaIn the 1990s a series of shorter-run financial crises occurred in LatinAmerica (1994ndash95) East Asia (1997) Russia (1998) and Brazil (1998ndash99) The impacts of the crises spread to other countries and regionsThere were some similarities among the crises In most cases there wereincreased private capital flows into the countries shortly before the cri-ses including both bank lending and private investments The IMFgradually relaxed its rules on capital flows and encouraged capitalmovements in the 1990s Real exchange rates generally had appreci-ated as well especially in Mexico and Thailand When investors be-came nervous they pulled their money out and the governments wereforced to let their currencies depreciate Problems worsened when neigh-boring countries were forced to depreciate their currencies because in-vestors as well as investors pulled out their money As capital dried upin the affected countries investment stalled and the countries went intodeep recessions In some cases the countries had problems with deficitspending or inflation before these crises but in many cases did not

The crises demonstrated that completely deregulated capitalflows carry both benefits and costs Advantages to the borrowersinclude resources to finance investments with high social returns


389


and to compensate for balance of payments problems and recessionsThe disadvantages are that foreign investors might pull their moneyout quickly thereby destabilizing the economy Also the money maygo toward projects that are too risky if the investors think that the gov-ernment or the IMF will bail them out if there is a problem In additioncapital flows can affect the exchange rate If capital suddenly starts toflow out the government must choose between higher interest rates ordepreciation of the exchange rate7

Governments can reduce the chances of financial crises by stron-ger regulation of domestic banking and financial institutions andimproving information flows with respect to economic and financialconditions The IMF can assist by helping devise solutions in times ofcrisis while providing some financial assistance when private fundsare not available The IMF must be sophisticated in its ability to distin-guish between countries that are being fiscally irresponsible from thosethat are financially sound but are suffering sudden capital outflowsdue to temporary regional or global events

Governments can not simultaneously fix the value of the exchangerate and use macroeconomic policy tools to offset economic problemsif capital is allowed to flow in or out of the country freely Thereforesome countries choose to have a flexible exchange rate with relativelyfree capital flows and attempt to manage their macroeconomic poli-cies Others choose to fix their exchange rates and institute some con-trols on capital flows to minimize the danger of financial crises Thiscombination allows them to manage their macroeconomic policies Athird group of countries decide to fix their exchange rates allow freecapital flows but give up the ability to influence their macro-economiesThe latter countries are usually small ones with major trading partnersto which they tie their currency They also want to encourage strongforeign capital investment and therefore do not want to institute capi-tal controls

Lessons from the Global Financial CrisisIn 2008-09 a financial crisis in developed countries led by rapid depre-ciation in housing assets as a result of poor lending practices and laxfinancial regulation in the United States spurred a deep global reces-sion Due to integration of product and capital markets the effects werefelt throughout the world including poor countries Trade flows werereduced capital became scarce unemployment was up and more

7 Joseph Joyce ldquoThe IMF and Global Financial Crisesrdquo Challenge July-August 2000p 98

390

people slipped below the poverty line The recession hit the poor dou-bly hard as many were experiencing the effects of the food price crisisdiscussed in Chapters 1 and 3 One lesson for developed countries wasthe need to tighten regulations not only in the banking sector but in theinsurance sector that contributed much to the crisis A second lesson isthe need for central banks such as the US Federal Reserve to pay greaterattention to asset bubbles as they occur One lesson for developing coun-tries is the need to institute more safety nets for the poor that can bedeployed immediately when global conditions turn sour due to marketdisruptions outside their control

SUMMARYMacroeconomic policies have a strong influence on prices on market-ing margins and hence on incentives for economic agents A macro-economy can be described in terms of aggregate demand supply orincome Policies in developing countries are frequently aimed at thesupply side of the economy Both fiscal and monetary policies influ-ence inflation Developing countries often go into debt because of manypressing needs and limited tax revenues

Governments use foreign exchange rates interest rates and wagerates to influence trade investment and incomes Many developingcountries overshyvalue their exchange rates a policy that discourages ex-ports and encourages imports They often subsidize interest rates andset minimum wages for the urban formal sector Agricultural and landprices are influenced by macroeconomic policies

Governments pursue particular macroeconomic policies to stimu-late economic growth distribute income correct debt problems lowerinflation and so on Policies are influenced to a large extent by urbanlobbies Forces external to the country also come into play Well-integrated capital markets and bloc-floating exchange rates tie eco-nomic policies of developing to developed countries

While it is natural for governments in developing countries to bor-row to finance investment massive borrowing during the 1970s fol-lowed by high interest rates and tight money in the early 1980s led to asevere debt crisis Many of the loans in Latin America were from com-mercial banks and many of the loans in Sub-Saharan Africa were fromofficial sources Countries were forced to adjust their economies by ex-porting more importing less and reducing government spending inorder to pay off debts Attempted solutions to the debt crisis have beenslow to reduce LDC debts Much of the burden of adjustment continuesto fall on the developing countries themselves Structural adjustment


391


programs often hurt the poor in the short run suggesting a need forsafety-net programs and increased debt forgiveness

In recent years several developing countries have experiencedshort-run financial crises in which private capital has flowed out rap-idly causing severe economic downturns Capital controls are a pos-sible remedy for capital outflows but come at the cost of reduced for-eign investment Some countries with flexible exchange rates choose toallow free capital flows but then attempt to manage their macro-policies to offset the dangers of the sudden capital flows

IMPORTANT TERMS AND CONCEPTSBalance of payments Fiscal policyBloc-floating exchange rate Free riderCapital flight International capital marketCash buybacks Macro-pricesCurrent account deficit Minimum wageDebt crisis Monetary policyDebt-for-conservation swaps Money supplyDebt-for-equity swaps Paris ClubDebt relief Secondary marketDebt rescheduling Structural adjustment programExternal debt Urban lobbyFinancial crisis

Looking AheadInternational relations between more-developed and less-developedcountries are influenced in major ways by foreign assistance pro-grams In the following chapter we discuss the various types of for-eign assistance motivations for the aid and effects on the less- andmore-developed countries

QUESTIONS for DISCUSSION1 What are the three ways a macro-economy can be described so as to

arrive at gross domestic product (GDP)2 What do we mean by a countryrsquos ldquofiscal policyrdquo3 What are the two primary monetary policies that can be used to fi-

nance a government deficit and what are their effects4 What are the major macro-prices that governments often try to set5 Why do countries overvalue their currencies and what is the effect of

overvaluation6 What are the advantages of high versus low interest rates

392

7 How are wage rates determined and what are the advantages anddisadvantages of minimum wage laws

8 How are land prices affected by macroeconomic policies9 Why do governments pursue particular macroeconomic policies10 What is a structural adjustment program and what are its effects11 How does a bloc-floating exchange rate system differ from a fixed

exchange-rate system12 How are interest rates capital movements exchange rates and trade

interconnected13 How might a macroeconomic policy suppress the comparative ad-

vantage of a country in producing a particular good14 Why is it natural for developing countries to borrow from devel-

oped countries15 Describe the major causes of the debt crisis16 Why have many heavily indebted countries devalued their curren-

cies17 Why have voluntary rescheduling of debt servicing by commercial

banks not resolved the debt crisis18 What are the advantages and disadvantages of cash buybacks of

debt Of debt-for-equity swaps Of debt-for-conservation swaps19 Why are the urban poor often hurt more by structural adjustment

programs than are semi-subsistence farmers20 What are the pros and cons of a developing country defaulting en-

tirely on its debts21 What were the causes of financial crises in Asia and Latin America

in the 1990s22 Who are the HIPCs

RECOMMENDED READINGSCohen Benjamin J ldquoWhat Ever Happened to the LDC Debt Crisisrdquo Chal-

lenge vol 34 (May-June 1991) pp 47ndash51Joyce Joseph ldquoThe IMF and Global Financial Crisesrdquo Challenge vol 43

(July-August 2000) pp 88ndash107Rogoff Kenneth ldquoInternational Institutions for Reducing Global Finan-

cial Instabilityrdquo Journal of Economic Perspectives vol 13 Fall 1999


393

CHAPTER 19

Capital Flows ForeignAssistance and Food Aid

Everywhere one turns in global poverty reduction efforts high-minded rhetoric provides tattered veneer over deficient funding

mdash Jeffrey Sachs1

THIS CHAPTER1 Examines the nature of public and private capital flows to develop-

ing countries including the rationale for and major types of foreignassistance to agriculture

2 Discusses the types the objectives and the positive and negativeeffects of food aid programs in less-developed countries

3 Identifies means for improving the effectiveness of foreign assis-tance

DEVELOPMENT ASSISTANCE PROGRAMS RELATED toAGRICULTUREFlows of capital into developing countries can help overcome a short-age of capital relative to labor Private capital flows however may notbe sufficient to meet development needs for several reasons Restric-tions on investments and other forms of capital flows in developingcountries create risks for private investors as do political uncertaintyand long gestation periods for projects Many key forms of infrastruc-ture have attributes of public goods and it is difficult to charge for useof public goods All these factors reduce the willingness of the privatesector to undertake investments and hence can slow the flow of capi-tal into developing countries The absence of sufficient incentives to

1 Jeffrey Sachs ldquoA New Global Consensus on Helping the Poorest of the Poorrdquo An-nual World Bank Conference on Development Economics 1999

394


invest can also result from incomplete development of internationalcapital institutions Foreign development assistance (aid) is one pos-sible solution to help reduce the resulting capital imbalance includingassistance to the agricultural sector

Foreign aid in support of agriculture in developing countries hastaken many forms and the nature and magnitude of its effects havegenerated considerable debate Multiple objectives drive all foreign aidprograms with the result that the distribution of aid among differentcountries often bears little relation to need as manifested by hungerpoverty or presence of market failure Hence we begin this chapter byexamining the rationale for foreign assistance

Rationale for Foreign Capital Flows and AssistanceFrom a donorrsquos perspective the rationale for foreign aid in general aswell as for aid to agriculture rests on humanitarian (moral or ethical)political (strategic) and economic (commercial) grounds2 Several vari-ants of the humanitarian argument have been made based on compen-sation for past injustices uneven distribution of global natural resourcesand a moral obligation to help the least-advantaged members of soci-ety3 The premise is that the emergence of international economic andpolitical interdependencies has extended the moral basis for distribu-tive justice from the national to the international sphere Foreign assis-tance to agriculture can benefit one of the largest and poorest sectors inmost developing countries

The political self-interest rationale is based on the notion that aidwill strengthen the political commitment of the recipient to the donor(s)Aid is often given during wars and conflicts when there is an opportu-nity for political realignment or as part of a negotiated agreement toprovide aid in exchange for certain political or military actions

The argument that aid serves a countryrsquos economic self-interest isbased on the idea that aid increases exports from and employment inthe donor country For example producers of food grains in the UnitedStates benefit from food aid to the extent that it increases total quanti-ties demanded Food aid may open markets to a countryrsquos exports byinitiating commercial contacts In general foreign aid to agriculture canimprove nutrition and stimulate economic growth thereby in low-

2 See Anne O Krueger ldquoAid in the Development Processrdquo World Bank Research Ob-server vol 1 (January 1986) pp 57-58 and see Vernon W Ruttan United StatesDevelopment Assistance Policy (Baltimore Johns-Hopkins 1996) chapter 2

3 Vernon W Ruttan ldquoSolving the Foreign Aid Vision Thingrdquo Challenge vol 34 (May-June 1991) p 46

395

income countries stimulating demand for agricultural imports and byextension donor exports Much foreign assistance is tied to the pur-chase of goods such as food or equipment from the donor These pur-chases directly benefit producers in the donor countries

This complex set of reasons for foreign assistance means that for-eign aid does not always go to where need is greatest The fact that aidis given in part for donor self-interest purposes would seem to imposeon donors some obligation to ensure that the distribution and types offoreign assistance provided do not harm the recipients

The level and distribution of US foreign assistance by countryover time is shown in Table 191 In the 1960s the United States distrib-uted an average of just under $17 billion per year in 2007 dollars Mostof the top ten recipients were in Asia including a number of countriesthat later enjoyed rapid economic growth and earned high incomes asallies and commercial partners with the United States Aid flows de-clined for many years and the top-ten list evolved in response to con-flicts and peace accords Israel and Egypt were the top recipients in the1980s and 1990s In recent years total aid flows have grown back totheir level of the 1960s and Iraq and Afghanistan have risen to the topof the top-ten list while for the first time the list includes four countriesin Sub-Saharan Africa the D R Congo Sudan Ethiopia and Nigeria

Foreign Aid in the Context of Other Capital FlowsForeign aid is not the largest type of capital flow to developing coun-tries Larger flows occur in the private sector through portfolio invest-ment and through individual remittances by workers to their familiesin developing countries

Private investment consists of either portfolio investment or for-eign direct investment (FDI) Portfolio investors buy shares or bondsand can provide an important source of capital for middle-income de-veloping countries with growing financial markets FDI is the construc-tion or purchase of company-operated facilities which is particularlyhelpful if it involves the transfer of proprietary technologies and busi-ness methods Both kinds of investment can be very large and produc-tive but flows are limited to particular sectors and countries and havefluctuated widely over the years

Remittances occur when migrants send money back to their fami-lies as a gift or for investment These flows tend to be more stable thanprivate investment have grown rapidly and are now more than twiceas large as foreign aid In 2007 the total amount of remittances receivedby developing countries was estimated to have been $280 billion or 21

CHAPTER 19 mdash CAPITAL FLOWS FOREIGN ASSISTANCE AND FOOD AID

396


TA

BL

E 1

9-1

T

OTA

L a

nd

TO

P T

EN

RE

CIP

IEN

TS

of

US

O

FF

ICIA

L

DE

VE

LO

PM

EN

T A

SS

ISTA

NC

E 1960ndash2007

To

tal

to a

ll c

ou

ntr

ies

(mil

lio

ns

of

con

stan

t 20

07 U

S d

oll

ars

per

yea

r)

1960

-69

1970

-79

1980

-89

1990

-99

2000

-07

167

859

649

109

059

429

165

95

To

p t

en r

ecip

ien

ts (

per

cen

tag

e o

f to

tal)

1960

-69

1970

-79

1980

-89

1990

-99

2000

-07

Ind

ia20

5

Isra

el

11

8Is

rael

19

6E

gy

pt

17

4Ir

aq

19

3

Vie

t N

am9

4V

iet

Nam

10

1E

gy

pt

16

5Is

rael

13

8A

fgh

anis

tan

4 7

Pak

ista

n8

8In

dia

6

7

El

Sal

vad

or

3

6H

aiti

2

0E

gy

pt

3 6

Ko

rea

6 4

Eg

yp

t

5 6

Ban

gla

d

2

6E

l S

alv

ado

r

2 0

Co

lom

bia

2 7

Bra

zil

5 6

Ind

on

esia

5

2P

hil

ipp

ines

2 3

Ph

ilip

pin

es

2 0

Jord

an

2 4

Tu

rkey

4 2

Pak

ista

n

4

7P

akis

tan

2

2S

om

alia

1

9D

R C

on

go

2 3

Eg

yp

t3

0K

ore

a

4 0

Su

dan

2

2B

oli

via

1 5

Su

dan

2 3

Ch

ile

2 5

Ban

gla

des

h

3

8C

ost

aRic

a

1

8N

icar

agu

a

1

4E

thio

pia

2 2

Ind

on

esia

1 9

Cam

bo

dia

2

1H

on

du

ras

1 7

Ban

gla

des

h

1 3

Pak

ista

n

2

0T

aiw

an1

8Jo

rdan

2

0T

urk

ey

1

6P

eru

1

2N

iger

ia

1 2

Sou

rce

Cal

cula

ted

fro

m O

EC

D

Inte

rnat

ion

al D

evel

op

men

t S

tati

stic

s d

atab

ase

(htt

p

st

ats

oec

d

org

q

wid

s)

397

percent of their total income4 Most of these remittances were sent tomiddle-income developing countries such as the Philippines whichhave many educated and relatively high-earning migrants who chooseto invest their earnings back home Lower-income countries such asNigeria receive a small fraction of all remittances but because theirincomes are so low these remittances are very important to them Forexample the 49 least-developed countries together received only $40billion in remittances during 2007 but that represented 59 percent oftheir total income Like other flows remittances vary widely across coun-tries In extreme cases such as Haiti remittances can be 20 percent ormore of total national income whereas some very poor countries suchas Madagascar or Mauritania receive very little (see Box 19-1)

Foreign aid is different from private investment or remittances inthat by definition it uses government or philanthropic funds to serve apublic purpose Total foreign assistance encompasses official develop-ment assistance plus military assistance and export credits Often pri-vate funds from voluntary agencies are included Foreign developmentassistance as the term is used in this chapter excludes the military-related component and export credits while the term official develop-ment assistance (ODA) excludes private fund transfers as well To qualifyas any type of foreign assistance the resources transferred must be sentfrom donor(s) to a recipient without a commensurate return flow ofresources There may be good will political support and so on butdirect payments are not made in return

At one extreme foreign development assistance can occur as loansat near-market interest rates At the other this assistance can be an out-right grant In the middle the assistance can be a loan at a concessional(below-market) interest rate or with a maturity period longer than thatcommercially available5 Foreign development assistance also can comein the form of food aid or as technical assistance to provide neededexpertise To be classified as ODA by the Development Assistance Com-mittee of the Organization for Economic Cooperation and Development(OECD) the assistance must have at least a 25 percent grant element6

The grant element is defined as the excess of the loan or grantrsquos value

4 Data in this section are World Bank staff estimates updated periodically and avail-able online through wwwworldbankorgremittances

5 See Krueger ldquoAid in the Development Processrdquo pp 57ndash586 The OECD is an organization of 30 industrialized nations designed to promote eco-

nomic growth and stability among these relatively high-income countries and inthe world as a whole


398


BOX 19-1REMITTANCES as a DEVELOPMENT TOOL

Remittance transfers are generally small amounts sent to family membersthrough wire transfers banks or hand-carried to individuals in developingcountries Their importance differs by region and the top four recipientcountries are India China Mexico and the Philippines Top recipient coun-tries in terms of remittances as a proportion of national income (more than25) are Tajikistan Moldova and Honduras Rapid growth and variationacross countries suggests that improving how remittances are transferredcould have a big impact on development Efficiency can be improved bylowering the costs of and risks of transferring money through more coop-eration and better regulation of international financial institutions Stepsare also needed to improve the enabling environment within recipient coun-tries through reforms of banking systems more transparent rules of ac-cess encouraging acceptance of small-scale deposits and so on Incen-tives can be given for participation in the formal financial sector to helpmobilize savings of remittance recipients and other potential small-scalecustomers Steps to encourage use of remittance funds for private produc-tive investments will channel these funds into capital accumulation andaway from short-term consumption Well-defined legal and regulatory frame-works will help build confidence of remitters to make productive invest-ments and lower risks of losing their investments Many of these stepswould have the side benefit of mobilizing all forms of small-scale savingsand investments and this micro-finance has been shown to facilitate broad-based growth (see Chapter 11)

See Samuel Munzele Maimbo and Dilip Ratha Remittances Development Im-

pact and Future Prospects (Washington DC World Bank 2005)

over the (present) value of repayments calculated with a 10 percentinterest rate

Trends in ODA amounts are shown in Table 19-2 In the early 1960sUS foreign aid was more than half of all foreign aid US assistancethen declined while others expanded their aid programs such that bythe 1990s the United States was giving only about one-sixth of the glo-bal aid total In the most recent decade ODA from both the UnitedStates and other donors has grown again peaking in 2005

Development Assistance ProgramsModern foreign aid programs began after World War II with recoveryassistance provided by the United States to war-torn Western Europeand East Asia A wider US development assistance program grew outof President Harry S Trumanrsquos inaugural address of January 20 1949

399

TABLE 19-2 UNITED STATES and WORLD OFFICIALDEVELOPMENT ASSISTANCE (ODA) 1960ndash2007

(US $millions 2000)

Year Total ODA US ODA US as Total

1960 22256 13137 5901965 28879 17904 6201970 24835 11665 4701975 35514 11150 314

1980 49248 13420 2721985 41845 13683 3271990 65578 14108 2151995 64351 8045 125

2000 53749 9955 1852001 52423 11429 2182002 58297 13290 2282003 69065 16320 236

2004 79432 19705 2482005 94762 24722 2612006 89539 20188 2252007 86518 18214 211

Source OECD database Development Cooperation Report 2008

Truman called for a ldquobold new program for making the benefits of sci-entific advances and industrial progress available for the improvementand growth of underdeveloped areardquo7 The program provided techni-cal assistance to Taiwan South Korea and other countries in SoutheastAsia the Middle East and the less-developed countries of Europe Theprogram was followed by other programs that were consolidated in1961 to form the US Agency for International Development (USAID)USAID remains the principal development assistance agency of theUnited States Government8

Other donor countries also have development assistance effortsand have similar agencies leading their foreign aid programs such asthe Japan International Cooperation Agency (JICA) the UK Depart-ment for International Development (DFID) and the Canadian Inter-national Development Agency (CIDA) During the 1950s assistance was

7 Harry S Truman ldquoInaugural Address of the Presidentrdquo Department of State Bulle-tin 33 Washington DC January 1949 p 125

8 See Elizabeth Morrison and Randall B Purcell Players and Issues in US Foreign Aid(West Hartford Conn Kumarian Press 1988) for additional historical details


400


extended by the United Kingdom France the Netherlands and Bel-gium to their former colonies The list of donors grew during the 1960sand now includes most members of OECD and many members of theOrganization of Petroleum Exporting Countries (OPEC)9 Even thoughthe United States gives more ODA than any other country in recentyears it has ranked at or near the bottom among OECD countries interms of the ratio of ODA to GNP a rough measure of the ability toldquoaffordrdquo aid In 2003 it gave 015 percent while the weighted averageacross all OECD countries was 025 percent and simple average was041 percent In March 2002 the OECD countries pledged to contribute07 percent of their GNP to ODA as a means of achieving the UnitedNations Millennium Goals However few countries have achieved thatgoal

The actual content of foreign assistance programs varies widelyover time and across donors In the last decade the biggest area of em-phasis for US assistance has been on improving governance institu-tions in developing countries This area received very little aid in the1970s but grew rapidly beginning in the 1980s The second-biggest areais now population and reproductive health which includes programsfor HIVAIDS prevention Emergency response programs are the third-largest area followed by debt forgiveness programs Food aid was thelargest area of focus in the 1970s and remained the largest in the 1980sbut has since fallen The Agriculture Forestry and Fishery sector wasthe second largest sector in the 1970s and 1980s but is now the seventhlargest sector Foreign assistance to agriculture includes such diversecomponents as aid used for agricultural research and extension irriga-tion projects rural roads agricultural education and training floodcontrol projects health improvement programs integrated rural de-velopment projects and agricultural policy assistance Comparing theaid allocations of the United States with those of all other donors re-veals that other donors place greater emphasis on aid to education anddebt reduction

Not all development assistance is administered through govern-ment agencies Governments sometimes contract for aid deliverythrough nonprofit nongovernmental organizations (NGOs) which areoften also supported by private charitable donations and commercial

9 OPEC is a group of countries devoted to seeking agreement among themselves re-garding selling prices and other issues related to oil exports OPEC members in-clude Algeria Ecuador Gabon Indonesia Iran Iraq Kuwait Libya Nigeria QatarSaudi Arabia the United Arab Emirates and Venezuela

401

activities10 Several of the largest nonprofit NGOs have religious affili-ations such as Catholic Relief Services or Lutheran World Relief thebiggest of these is a non-denominational Christian organization WorldVision International whose operations in 2008 involved more than $18billion in revenue plus in-kind donations valued at more than $700million11 Most NGOs specialize in specific areas For example the In-ternational Committee of the Red Cross and Doctors without Bordersspecialize in the health sector while Heifer International specializes inanimal agriculture Some NGOs have major advocacy programs suchas Oxfam and Bread for the World

NGOs differ widely in their sources of revenue For example theBangladesh Rural Advancement Committee (BRAC) is a large NGOproviding microfinance and other commercial services In 2008 BRACreported total expenditures of $535 million of which only 27 percentwas donor funding12 Development assistance can be channeled throughfor-profit firms as well as NGOs The use of private contractors to de-liver foreign aid services is particularly important for the United Stateswhere firms routinely bid for contracts from USAID and other govern-ment agencies on a commercial basis

Although most foreign aid funding comes from governments pri-vate philanthropy also plays an important role in international devel-opment The Rockefeller Foundation and other donor organizationsmade key contributions throughout the 20th century In the 1990s large-scale philanthropy by individuals such as George Soros and Ted Turnerbecame important followed by major grants from Bill and MelindaGates and from Warren Buffett whose combined grant making con-tributed over $12 billion for global health and over $300 million forglobal development in 200713 These and countless other acts of indi-vidual generosity alongside the even larger taxpayer-funded programscreate many opportunities to overcome past failings and meet new chal-lenges Managing aid in a cost-effective manner however is still a sig-nificant challenge

10 A detailed analysis of NGOs in US foreign aid is provided by Rachel McCleary andRobert J Barro ldquoPrivate Voluntary Organizations Engaged in International Assis-tance 1939ndash2004rdquo Nonprofit and Voluntary Sector Quarterly vol 37 no 3 (Septem-ber 2008) pp 512ndash36

11 World Vision International 2008 Annual Review Available online at wwwwviorg12 BRAC BRAC at a Glance March 2009 Available online at wwwbracnet13 Bill and Melinda Gates Foundation Annual Report 2007 which is available online at

wwwgatesfoundationorg


402


Multilateral Assistance ProgramsWhile much aid is bilateral or country-to-country a second approachto giving and managing aid is for multiple donors to combine theirresources through multilateral organizations in which donated fundsare pooled and managed for a common purpose Combining funds helpsdonors to leverage their contributions and obtain access to specializedprofessional staff and impartial management

The leading multilateral organization for international develop-ment is the World Bank which was created in 1944 Unlike other devel-opment agencies the Bank does not disburse donor funds as grants mdashand unlike other banks it does not take deposits Instead the WorldBank uses donor contributions to guarantee the repayment of fundsborrowed from investors and it then lends at low interest rates to de-veloping countries The World Bank has more than 180 country mem-bers and consists of three major arms that together represent the largestsource of long-term multilateral economic development assistance Thefirst arm the International Bank for Reconstruction and Development(IBRD) established in 1945 makes long-term loans at interest rates re-lated to its own cost of borrowing mostly for large-scale projects Thesecond arm the International Development Association (IDA) estab-lished in 1960 uses profits on the IBRD loans and other funds to subsi-dize loans to the poorest countries Loans from IDA have long repay-ment periods and concessional interest rates As of 2008ndash09 the opera-tional cutoff for eligibility for a country to borrow on these terms wasabout $1000 per person per year in gross national income The thirdarm the International Finance Corporation (IFC) is a profit-makingenterprise and is funded by capital from its member countries It makesloans to the private sector to mixed (publicprivate) enterprises andto government-owned agencies that channel financial assistance to theprivate sector Two other arms of the World Bank are the MultilateralInvestment Guarantee Association (MIGA) and the International Cen-tre for the Settlement of Investment Disputes

In addition to the World Bank there is a set of regional develop-ment banks for Latin America the Caribbean Asia Africa and EasternEurope These banks operate in a similar way to the World Bank buton a smaller scale The World Bank is also complemented by the Inter-national Monetary Fund (IMF) a sister organization with a much smallerstaff whose purpose is to make short-term emergency loans for macro-economic stabilization as opposed to the long-term development ob-jectives of the multilateral banks The World Bank and IMF are themajor multilateral sources of development funding but large numbers

403

of technical staff provide assistance through the other UN agenciesdescribed in Box 19-2

Effects of Foreign AssistanceThe economic effects of development assistance on recipients are theregular subject of debate in the popular press and among policy mak-ers The effects of aid can be assessed at the project the sector or thenational levels At the project level rates of return have been calculatedfor individual investments such as roads schools or agricultural re-search These calculations typically yield high returns for example the


BOX 19-2MAJOR UNITED NATIONS AGENCIES

for FINANCIAL and TECHNICAL ASSISTANCE to DEVELOPING COUNTRIES

The United Nations Development Programme (UNDP) is the centralfunding and coordinating mechanism within the United Nations for techni-cal assistance to developing countries The United Nations Fund for Popu-lation Activities (UNFPA) helps countries gather demographic informationundertake family planning projects and formulate population policies andprograms

The United Nations Childrenrsquos Fund (UNICEF) provides technicaland financial assistance to developing countries for programs that benefitchildren and for emergency relief for mothers and children

The purpose of the Food and Agriculture Organization (FAO) is toraise nutrition levels and standards of living by improving the productionand distribution of food and other commodities derived from farms fisher-ies and forests It also helps countries with food emergencies

The World Food Programmersquos (WFP) purpose is to stimulate eco-nomic and social development through the use of food aid and to provideemergency food relief

The World Health Organization (WHO) conducts immunization cam-paigns promotes and administers research and provides technical assis-tance to improve health systems in developing countries

The United Nations Education Scientific and Cultural Organiza-tion (UNESCO) promotes international intellectual cooperation in educa-tion science culture and communications

The UNDP UNFPA WFP and UNICEF are funded through voluntarycontributions public and private while FAO WHO and UNESCO arefunded primarily through assessments on member nations with some ad-ditional voluntary contributions and other sources of funds

Source Details on UN agencies are provided at wwwunorg

404


World Bankrsquos independent evaluation group estimated the real rate ofreturn for each of 396 projects that ended between 1995 and 2000 andfound an average return of 22 percent per year14 This payoff is muchhigher than the interest paid to borrow these funds which suggeststhat increased lending for similar investments would raise total eco-nomic growth rates

Given the high rates of return to many aid projects questions areraised about why private lending has not been more forthcoming orwhy concessional loans are needed An important part of the answer isthat returns to aid are spread among the recipient population in waysthat a private company could not capture to repay its investors Forexample aid that helps a small child avoid malnutrition or attend schoolcan generate benefits far in excess of its cost but those benefits cannotbe seized by a lender Indeed aid is most effective when it focuses onprecisely these kinds of public services which will not be provided byprivate firms The developing countryrsquos own governments cannot pro-vide enough of these public goods because they lack the tax base oradministrative capacity to finance them from either current revenuesor to repay its own loans As a result public-sector development assis-tance from richer to poorer countries has an important role to play inmaking the world economy more efficient as well as more equitable

At the sector or national levels development assistance can aug-ment domestic savings help provide foreign exchange and minimizeadverse impacts of needed policy reforms These effects can stimulategrowth Many studies have attempted to assess the impact of develop-ment assistance at the national level as it affects savings investment orgrowth Generally the results have been positive but in many casesinconclusive15 The fundamental problem is that aid typically flows tocountries in trouble and so is usually associated with bad economicoutcomes even though without aid the outcome might have been worsePoor countries face many different kinds of problems from natural di-sasters and disease to wars and corruption A widely-cited view sug-gests that aid has positive effects on growth only in countries with good

14 World Bank Annual Review of Development Effectiveness 2000 supplement Table 13aAvailable online at wwwworldbankorg

15 For more details see Constantine Michalopoulos and Vasant Sukhatme ldquoThe Im-pact of Development Assistance Review of Quantitative Evidencerdquo in AID andDevelopment edAnne O Krueger Constantine Michalopoulos and Vernon WRuttan (Baltimore Md Johns Hopkins University Press) 1989) chapter 7

405

fiscal monetary and trade policies but recent studies suggest that aidhas helped even in countries with weak governments16

The small size of aid relative to other capital sources as describedabove undoubtedly has contributed to many of the inconclusive find-ings about the effects of aid on growth It is also difficult to measure theeffects of aid without breaking it down into its different types and thedifferent reasons for which it is given For example aid for infrastruc-ture may have different impacts on growth than aid for policy reformor for emergency food relief Emergency food relief programs may bevery effective at reducing hunger and human suffering associated withshort-term problems but their effects on aggregate growth may be hardto measure

Despite a relatively weak link between aid and aggregate economicgrowth for reasons outlined above aid has helped reduce poverty andimproved the quality of life of the poor Targeted aid has helped eradi-cate smallpox put polio on the brink of eradication reduced death fromdiarrheal diseases and reduced the incidence and severity of many ill-nesses17 These results will over time contribute to economic growthand development but their effects are indirect and hard to measure

Few studies have attempted to evaluate the effects of developmentassistance to the agricultural sector One study for 98 countries did finda positive effect of foreign assistance to agriculture from 1975 to 1985particularly in Asia However the effects of aid to agriculture in LatinAmerica and the Middle East were non-significant18 Investment in re-search and dissemination of new technologies may be among the mosteffective kinds of aid for reducing poverty especially in Africa wherethe level of such investment has been lowest and where rural poverty isparticularly severe19

16 See Craig Burnside and David Dollar ldquoAid Policies and Growthrdquo American Eco-nomic Review vol 90 (September 2000) pp 775ndash86 and Carl-Johan Dalgaard HenrikHansen and Finn Tarp ldquoOn The Empirics of Foreign Aid and Growthrdquo The Eco-nomic Journal vol 114 no 496 (June 2004) pp F191ndashF216

17 See Jeffrey Sachs The End of Poverty (New York Penguin Press 2005) Joseph StiglitzldquoOverseas Aid is Money Well Spentrdquo Financial Times April 14 2000 p 20 andShalendra Sharma ldquoThe Truth About Foreign Aidrdquo Challenge (July-August 2005)pp 11ndash25

18 See George W Norton Jaime Ortiz and Philip G Pardey ldquoThe Impact of ForeignAssistance on Agricultural Growthrdquo Economic Development and Cultural Change vol40 (July 1992) pp 775ndash86

19 See Colin Thirtle Lin Lin and Jenifer Piesse ldquoThe Impact of Research-Led Agricul-tural Productivity Growth on Poverty Reduction in Africa Asia and Latin AmericardquoWorld Development 31 vol 12 (December 2003) pp 1959ndash75


406


Effects on DonorsMany donor countries believe that development assistance is effectivein stimulating growth in developing countries but ask whether the ef-fects on their own countries are negative In other words they questionwhether their economic self-interest is served by aid For example farmgroups and the farm press in the United States frequently express con-cern that foreign aid may be generating foreign competition Severalstudies have assessed whether foreign aid to agriculture does indeedhurt US farmers These studies have found that for particular com-modities in particular countries at particular stages of developmentforeign competition is increased as a result of aid However they alsohave found that agriculture as a whole in donor countries is helped byforeign aid to agriculture in developing countries20

The reason farmers in donor countries often benefit from aid toagriculture in developing countries is that agricultural growth in LDCsincreases incomes and these incomes in turn stimulate food demandMiddle-income countries particularly still have relatively high popu-lation growth rates and high income elasticities of demand for foodDemands shift toward higher-quality grains and livestock products asincomes rise Consequently when agricultural production rises in thesecountries if domestic economic policies permit that production growthto stimulate other sectors of the economy the result is an expansion infood demand that must be met partially through food imports Of coursewhen countries eventually reach higher income status their growth infood demand slows If and when most of the currently developing coun-tries reach that status trade will be governed by comparative advan-tage and trade-distorting policies Development assistance to agricul-ture will no longer be an issue

In summary while empirical evidence is not always conclusiveabout the effects of development assistance in general or to agriculturein particular it appears that positive but modest gains are likely forboth recipients and donors It is unlikely that large gains will be real-ized except in a few small countries because aid usually represents asmall portion of ODA

20 See for example Alain de Janvry Elisabeth Sadoulet and T Kelley White ldquoForeignAidrsquos Effect on U S Farm Exportsrdquo U S Department of Agriculture Economic Re-search Service Foreign Agricultural Economic Report Number 238 WashingtonDC November 1989 and James P Houck ldquoLink Between Agricultural Assistanceand Agricultural Traderdquo Agricultural Economics vol 2 (October 1988) pp 158ndash66

407

FOOD AIDFood aid has been an important and controversial dimension of foreignassistance since the mid-1950s Its importance relative to other kinds ofaid has fallen over time but it is still a significant component of USforeign assistance The United States has been the largest source of foodaid since the enactment of the Agricultural Trade Development andAssistance Act of 1954 commonly referred to as Public Law (PL) 480Food aid once represented about one-half of U S grain exports but inrecent years it has declined to a small fraction of those exports

The role and effects of food aid have been controversial because ofits many purposes While food aid fulfills a humanitarian and develop-ment mission it also provides a means for donor countries to disposeof surplus commodities and to develop new markets As with any for-eign aid food aid serves the foreign policy objectives of donors Whilethis multiplicity of objectives has added instability over time to foodaid allocations it also has strengthened the political support for main-taining food-aid programs within the donor countries

Critics of food aid have argued among other things that unre-stricted cash donations would be preferable to food While it is clearthat recipients would prefer cash many donors treat food aid as anaddition to rather than a component of their economic assistance It ishighly unlikely that donor budgets would be expanded by the value offood aid if the latter were eliminated

History of Food AidThe history of food aid to developing countries is marked by shiftingemphases on its multiple objectives During the period of 1959 to 1965the United States and Canada were particularly concerned about dis-posal of farm surpluses developing markets for farm products andproviding emergency food relief Most of the aid provided during thisperiod was in grain but several other products were given includingtobacco In 1961 an amendment was added to PL 480 to permit foodto be used for economic development instead of being restricted toemergency relief Improved export markets led by demand growth indeveloping countries reinforced the objective that food aid helps de-velop markets

The era from 1966 to 1972 was a period of heavy use of food aid foremergency relief particularly in drought-stricken areas of South AsiaSelf-help of recipients also was promoted during this period The Euro-pean Community and Canada increased their shipments of food aidfor emergency relief in this period The 1966 to 1972 period might becalled the idealistic era of food aid


408


Food aid helped alleviate hunger in Ethiopia during the 1980s

Unfortunately any idealism with respect to food aid programswas pretty much destroyed by the cutbacks in food aid that followedfood price increases in 1972 to 1975 The United States had depleted itsgrain surplus by exporting commercially to the Soviet Union and othercountries From 1972 to 1973 US commercial grain exports doubledand the volume of food aid fell in 1974 to its lowest level since the en-actment of PL 480 Furthermore during this period half of all USfood aid went to South Vietnam and Cambodia as a result of US in-volvement in those countries

In 1975 the US Congress instituted more humanitarian and de-velopment criteria for receiving food aid by passing the InternationalDevelopment and Food Assistance Act (see Box 19-3) This legislationcalled for increased food aid to the poorest countries The remainder ofthe 1970s also saw increasing food aid quantities from EC countriesHowever the use of food aid for political purposes also increased after1975 For example US food aid to Bangladesh declined from 115 mil-lion tons in 1975 to 034 million tons in 1985 while food aid to Egyptincreased from 058 million tons to 200 million This increase to Egyptwas directly linked to the Camp David Peace Agreement signed withIsrael in 1979 Food aid quantities increased in the mid-1980s in responseto severe drought problems in Ethiopia the Sudan and otherSubshySaharan African countries In the 1960s most food aid went to Asiaand Latin America By the mid-1980s Sub-Saharan Africa was absorb-ing as much food aid as the much more populous Asia

409

BOX 19-3THE UNITED STATES PL 480 FOOD AID PROGRAM

Since 1954 most US food aid activities have been coordinated underPL 480 Numerous amendments and extension have been added to theoriginal act but currently the major provisions fall under the three followingtitles

Title I mdash Was formerly the most important component of PL 480 butby the early 2000s it had shrunk to about $100 million per year comparedto more than $50 billion in agricultural exports from the US Recipientgovernments buy grain on credit with interest rates of 3 percent or lessover 20 to 40 years repayable in local currency These governments cansell the grain internally and use the profits for development The lowerinterest rates and long repayment period mean that almost 70 percent ofthe food aid loan is a grant

Title II mdash involves gifts of food for emergency relief and for economicdevelopment in 1991 it surpassed Title I as PL 480rsquos largest componentnow accounting for more than 85 percent of the program The food is givento and distributed by private agencies such as CARE who use the food forinfant feeding programs and for mother and child health programs in addi-tion to emergency distribution In a recent year about 70 percent of CARErsquosbudget was PL 480 Shipping and labor are paid for by the US govern-ment Food given under Title II also is used in food-for-work programs

Title III mdash involved using food aid in government-to-government pro-grams to support economic development but has not received fundingsince 2001

Other US food aid programs exist but food aid is now dwarfed byagricultural export credit programs which support commercial grain ex-ports

Types of Food Aid Programs TodayEmergency food aid grabs most of the headlines as it relieves crisesassociated with droughts in Ethiopia the Sudan and North Korea andflooding in Bangladesh and other parts of Asia Emergency food aidhas also played a significant role in feeding refugees from AfghanistanIraq and other countries in recent years This short-term food aid isessential for reducing acute hunger problems The possibilities of us-ing food aid to foster long-term development however are more closelylinked to program or project food aid

Program food aid is in many respects similar to more generalfinancial assistance as it provides currency to buy imports in this casefood that can be sold or otherwise distributed in the domestic market


410


This aid fosters the development of marketing linkages with the do-nors it helps the recipients save foreign exchange and the funds gener-ated by the sales can be used for development Some donors participatein determining how the funds generated by commodity sales are usedDonors may insist that funds be used for investments in the agricul-tural sector or to support specific policy changes affecting agricultureSome of the recent food aid shipments to Sub-Saharan African coun-tries were intended to soften the adjustments to structural changes intheir economies

Project food aid is aimed at meeting specific development objec-tives Projects tend to be multiyear to be targeted at nutritionally vul-nerable individuals or groups and may involve food in exchange forwork on the project Donor and recipient countries agree on who willbe targeted by the project the amount of food each individual receivesthe delivery system for the food and the design implementation andmonitoring of the project activities21 Most of the projects involve therural sector and can vary in size from a few hundred thousand dollarsto $100 million or more Food aid projects often involve forestry devel-opment soil conservation and watershed management resettlementprojects training development of irrigation works and constructionand maintenance of rural roads

Effects of Food AidThe positive and negative effects of food aid on recipient countries havebeen studied and debated for many years On the positive side foodprovides real resources that can be used to expand investment andemployment Food aid can have a disproportionate but positive effecton disadvantaged groups notably by supporting specific nutrition orfood-for-work projects or by providing food to the poor for free or atsubsidized prices Food can be used to help recipient governments sup-port storage and stabilization schemes to provide a small buffer againstpoor production years

Food aid also can have adverse effects on the recipients Thesepotential adverse effects of food aid can occur in a number of ways (1)disincentive effects on local agricultural production through reducedprices because of greater supply (2) dependency effects because thegovernment can substitute food aid for agricultural development pro-grams and (3) the uncertainty of food aid quantities from year to year

21 See Robert Chase ldquoCommodity Aid for Agricultural Developmentrdquo in Trade Aidand Policy Reform ed Colleen Roberts (Washington DC World Bank 1988) pp199ndash204

411

The disincentive issue has been examined empirically in severalstudies22 In theory additional supplies could depress food prices anddiscourage production Some empirical studies have found this to bethe case but other studies have found the opposite The disincentiveeffect is minimized if food aid is given or sold to those who otherwisecould not afford the food Transferring food is like transferring incomeThe quantity of the aid compared to the countryrsquos overall food produc-tion is important For example it appears that there has been a disin-centive effect in Egypt due to the large quantities of aid shipped but itis extremely difficult to sort out the impact of food aid from the manypolicy-induced distortions Even when food aid reduces prices it is likelyto have a beneficial effect on the poor who generally purchase morefood grains than they sell23

The idea that food aid creates dependency has not been examinedas frequently Food aid is no different from other aid in that by provid-ing resources it may lead to less effort to raise revenues domesticallyor to promote agricultural development Conditions are usually placedby donors on program aid that minimize this possibility A second partof the dependency argument is that over the long run food aid leads tomore food imports and changes in preferences away from domesticallyproduced foods Some evidence shows that this preference effect maybe occurring although it is difficult to separate changes induced byfood aid from those that occur because of income growth and othertrade

Food aid can be used in a positive way by recipients to furtherboth agricultural and overall economic development Emergency foodaid will always be variable and it can play a major life-saving role dur-ing short-term emergencies It appears that the potential positive de-velopment role of food aid has not been fully exploited although someefforts are under way to improve its development contribution

Most donor countries find public opinion is generally supportiveof food aid especially when it is used in visible programs to preventstarvation The future however for food aid is uncertain due to budgettightening in donor countries reduced price supports for agricultureas a part of opening of global markets and questions about its effec-tiveness as a development tool Stronger multi-year commitments

22 See S T Maxwell and H W Singer ldquoFood Aid to Developing Countries A SurveyrdquoWorld Development vol 7 (1979) pp 223ndash47 for a summary of results of 21 studies

23 See James Levinsohn and Margaret MacMillian ldquoDoes Food Aid Harm the PoorHousehold Evidence from Ethiopiardquo National Bureau of Economic Research IncNBER Working Papers 11048 (2005)


412


Food aid is used in Kenya to help pay labor for road construction

are certainly needed if food aid is to be more effective in promotingdevelopment

SUMMARYForeign development assistance in support of agriculture in develop-ing countries has been substantial taken many forms and generatedconsiderable debate The rationale for foreign aid rests on various po-litical and economic interests as well as humanitarian grounds so aiddoes not always go to where need is greatest Aid may be channeledthrough government agencies NGOs or private contractors and comesmainly from donor-country governments but also from charitable do-nations and philanthropies Some aid is a simple grant but much of itcomes as loans at below-market interest rates Foreign aid to agricul-ture includes aid for agricultural research and extension irrigationprojects rural roads agricultural policy assistance and many otheritems

The United States is the largest donor country but the share oftotal ODA coming from the United States has declined over time TheUnited States has been particularly active in giving food aid whichprovides emergency relief in times of severe shortage and supportsspecific development projects and programs Food aid also provides ameans for donor countries to dispose of surpluses develop new mar-kets and pursue foreign policy objectives

413

IMPORTANT TERMS and CONCEPTSBilateral aid NongovernmentalConcessional interest rates organizationEconomic self-interest Official developmentFood aid assistanceForeign development assistance Point Four ProgramInternational Bank for Reconstruction Public Law 480 and Development US Agency for InternationalInternational Development Association DevelopmentInternational Finance Corporation The World BankMultilateral aid

Looking AheadThis chapter concludes the section of the book concerned with macro-economic and international issues affecting development The bookconcludes in the next chapter with a discussion of how the various com-ponents required for agricultural development can be combined in anoverall strategy An assessment of future development prospects is pro-vided and suggestions are made for how you as individuals can con-tribute to solving the world food-poverty-population problem

QUESTIONS for DISCUSSION1 What is the rationale for foreign development assistance2 What are the major types of foreign development assistance3 What are some of the major effects of foreign development assis-

tance on recipients and donors4 Distinguish between bilateral and multilateral aid5 Give several examples of foreign aid to agriculture6 How do NGOs differ from official sources of foreign development

assistance7 What are the three major arms of the World Bank and how do they

differ8 Which country is currently the largest bilateral donor of foreign

aid9 Why might foreign development assistance help US farmers10 What are the objectives of food aid11 What is the case for and against food aid12 How have food aid programs changed over time13 What is the difference between program and project food aid14 How do the three Titles of PL 480 differ


414

RECOMMENDED READINGSCollier Paul The Bottom Billion (New York Oxford University Press 2008)Easterly William The Elusive Quest for Growth (Cambridge MIT Press

2002)Lancaster Carol Foreign Aid Diplomacy Development Domestic Politics (Chi-

cago University of Chicago Press 2007)Riddell Roger Does Foreign Aid Really Work (Oxford Oxford University

Press 2007)Sachs Jeffrey The End of Poverty (New York Penguin 2005) especially

chapter 13


415

CHAPTER 20

Lessons and PerspectivesldquoProgress in reducing hunger has been uneven across regions andcountrieshellipreducing hunger and malnutrition will require strength-ening governance of the food and agriculture system at the globalcountry and local levelshellipscaling up public investment for agricul-tural and rural growth taking targeted steps to improve nutrition andhealth and creating an effective global system for preventing andmitigating disastershellipWe must push ourselves even further to de-velop and implement solutions and policies to achieve food andnutrition security for the poorest of the poor and those most afflictedby hungerrdquo mdash Joachim von Braun1

THIS CHAPTER1 Summarizes how the various components required for agricultural

development can be combined to increase agricultural productivityand stimulate economic growth and development

2 Discusses how principles discussed in this book can be used toassess future prospects for agricultural development in developingcountries

3 Suggests ways that individuals can contribute to reducing the food-poverty-population problem

AN INTEGRATED APPROACH to AGRICULTURALDEVELOPMENTIt is easy to be pessimistic about prospects for solving poverty and hun-ger problems in developing countries Many countries in Sub-SaharanAfrica have stagnated for decades and disease problems such as HIVAIDS have made a bad situation there worse Latin American countries

1 Joachim von Braun Director General International Food Policy Research Institutefrom remarks prepared for the CGIAR Annual General Meeting Marrakech Mo-rocco December 6 2005

416


have suffered periodic setbacks on the path to development and haveonly improved gradually over time Several Asian countries have grownrapidly over the past 30 years but population growth remains rapid inmany already densely-populated Asian countries while water becomesscarcer Concerns for the global environment have focused attention onthe growing problem of resource degradation especially of soils in alldeveloping regions Recent increases in energy prices have placed coststress on agricultural producers while commodity price volatility hasmade planning more difficult and harmed many consumers in devel-oping countries

Governments have been seeking policy solutions to these and otherproblems Over the past several years numerous policy prescriptionshave been suggested yet none has been universally successful Importsubstitution policies domestic and trade policy liberalization land re-form foreign aid education privatization investment in large-scaleindustries integrated rural development projects farming-systems re-search and many other solutions have been offered Some of these sug-gestions have contributed to the development process others have notBlame for slow progress often is laid at the doorstep of the developedcountries sometimes with justification

While economic development has been painfully slow and uneven(witness the rise in 2008ndash09) there is certainly room for guarded opti-mism Globally the percentage of people living in poverty fell in mostyears from the 1960s until 2009 as did the absolute number of mal-nourished people despite the growth in population While poverty andmalnutrition rose in 2008ndash09 due to a sharp increase in food prices anda global recession they may again fall as food prices stabilize and eco-nomic growth resumes

Several lessons have been learned about what it takes to stimulateagricultural and overall economic development One of these lessons isthat there are no panaceas Development requires a mix of technicaland institutional changes that work best in combination The exact mixvaries between countries and policies appropriate for one environmentmay not necessarily be so for another A second lesson is that develop-ment takes time and many of the investments necessary for long-runsustainable development have impacts long after they have been imple-mented This time lag requires patience and political stability A thirdlesson is that developing countries are primarily responsible for theirown development but interdependence in trade and capital flows meansthat developed-country policies can assist or retard that developmentA few years ago the United Nations and its member states set a seriesof millennium development goals for 2015 that would significantly

417

CHAPTER 20 mdash LESSONS AND PERSPECTIVES

reduce poverty hunger and disease while promoting education gen-der equality and environmental sustainability2 Some progress has beenmade toward achieving those goals although their total attainmentseems unlikely

In Economics of Agricultural Development you have examined thedimensions of world food-income-population problems (see top of Fig-ure 20-1) You have considered the interconnections among these prob-lems and their linkages to health nutrition literacy and the environ-ment There is enough total food in the world at the moment but hun-ger is caused by food price volatility and by distributional problemsthat are in many cases related to poverty There are short-term foodcrises and long-term or chronic malnutrition You have considered eco-nomic development theories the role of agriculture in those theoriesand the nature of existing agricultural systems You have learned thatdeveloping-country farmers tend to be relatively efficient at what theydo but have low productivity because of their limited access to re-sources their existing technological and institutional environments andthe pervasive risks they face Having learned something about the di-mensions of the problem the role of agriculture in economic develop-ment theories and the nature of agriculture in developing countriesyou then examined several components of the development processLetrsquos review below the interrelationships among those components andassess where the need is greatest for additional insights with respect tothe development process

Technical and Institutional Change in AgricultureIn the 1950s many development experts felt that the keys to agricul-tural development were capital investment and the transfer of tech-nologies from more-developed countries By the 1960s and 1970s it wasclear that technology transfers and capital investment had a role to playbut that many other factors were equally or more important Differ-ences in resource bases across countries meant that indigenous researchand extension were vitally important Education was required if coun-tries were to produce adapt transfer and receive new technologies Bythe 1990s countries that were successful in agricultural developmenthad put in place a research- and technology-transfer system that in-cluded (1) indigenous agricultural research stations and educational

2 See Jeffrey Sachs Investing in Development A Practical Plan to Achieve the MillenniumDevelopment Goals the Millennium Project (London Earthscan publishing 2005)

418


Figure 20-1 The hunger problem and the solution process

institutions (2) a mechanism for linking those stations to on-farm re-search and testing and (3) ties between the national research systemand the international agricultural research and training network

As important as indigenous capacity for agricultural research andextension is the last several years have also demonstrated the need fora whole series of policy or institutional reforms related to the agricul-tural sector These reforms have been proven important not only

419


because of their influence on production incentives and the distribu-tion of economic gains but also because of their influence on the typesof technologies produced and adopted Land reform improved creditpolicies marketing system development nondiscriminatory pricingpolicies rules on intellectual property protection efficient means ofmanaging risks and incentive systems to reduce environmental exter-nalities are examples of the institutional changes that may be required

New technologies are not gifts of nature and institutional changesdo not magically appear New technologies require research invest-ments and the levels and types of technologies produced and subse-quently adopted are influenced by changes in relative prices of inputsand outputs Institutional changes also are induced by changes in rela-tive prices and by technical change

The logic of the induced technical and institutional change theo-ries and their apparent empirical verification in several countries par-ticularly in East Asia give cause for optimism However the failure ofmany countries to follow a path of sustained development has forcedeconomists to broaden the induced innovation theory This broadeninghas come by incorporating transactions costs and collective action intothe theory

Transactions costs refer to the costs of information of adjusting afixed-asset base and of negotiating monitoring and enforcing contractsThe fact that information is not perfect and is costly to acquire and thatpeople are willing to exploit their situation at the expense of others hasreceived particular attention If one group has greater access to infor-mation than another that group can act collectively to press for poli-cies or new technologies that benefit it at the expense of others

If a small but wealthy elite with large landholdings finds it cheaperto acquire information and act collectively it may press for technicaland institutional changes for personal benefit at the expense of themasses The elite may press for changes that not only distribute incomein its favor but reduce the agricultural growth rate because the result-ing technologies and policies may not be appropriate for the resourcebase in the country

Factors that can help reduce transactions costs are those factorsthat reduce information costs Improved roads and communicationsinfrastructure are examples new communications technologies are hav-ing dramatic impacts even in remote areas More widespread access tomarket information is allowing producers to make decisions that in-crease economic efficiency Widespread access to education is also criti-cal as education allows people to better use information Land reformcan help in many countries as can institutional change to enhance

420


contracting to improve the legal infrastructure and to provide certaintypes of regulations3 Freer markets to provide efficient price signals toindividual farmers also should help

Markets are generally held to be the best means of transmittingsignals to actors In developing countries however market imperfec-tions due to transactions costs unequal asset distributions and otherfactors are the norm These factors also increase variability in pricesand exacerbate risks for producers and consumers Some governmentinvolvement is legitimate and necessary to reduce these imperfectionsand allow markets to work Government involvement can be justifiedto provide ldquopublic goodsrdquo to create equal access to opportunities andto achieve equity outcomes consistent with societyrsquos wishes

Macroeconomic and International Institutional ChangesIn the 1950s and 1960s (and to some extent before and after) severaleconomists in developing countries recommended policies that dis-couraged agricultural exports and encouraged production of goodsthat would substitute for imports The argument for these policieswas based on potential or perceived exploitation of developing coun-tries by more-developed countries However countries that inte-grated more closely into international markets tended to develop

Young boys in Guatemala

3 For example regulations may be needed to reduce environmental externalities toprovide food safety standards and for other purposes

421


more rapidly than those that closed or isolated their economies Themore rapid development was due in part to the lower level of rent-seeking behavior and corruption as well as the increased efficiencygains from trade and specialization

Some of the countries that discriminated against agricultural tradeencouraged capital-intensive imports causing capital-intensive indus-tries to develop in labor-abundant countries These industries placed adrag on economic development because human resources freed up byincreases in agricultural productivity were under-employed This ten-dency to develop capital-intensive industries may have been inducedin part by transactions costs and collective action but also by a per-ceived need to imitate more-developed countries

For the past 30 years several developing countries have sufferedfrom heavy external indebtedness This problem has forced some coun-tries to reform their policies in ways that are intended to spur longer-run economic growth The debt overhang is so large for some LatinAmerican and African countries however that without debt reductionon the part of those holding the loans development will remain im-peded Official debt can be rescheduled through the Paris Club and bymultilateral organizations Some debt reduction for the lowest-incomeheavily-indebted countries has occurred and more has been promisedHowever commercial debt reduction will only be achieved slowly with-out improved international overshysight to reduce the free rider problemthat currently exists

Continued efforts by developing countries to reduce overvaluedexchange rates and to phase out policies such as export taxes will berequired to stimulate agricultural growth Phasing out export taxeshowever will necessitate new mechanisms for generating governmentrevenues such as land or income taxes Such taxes become somewhatmore feasible as information flows improve in a country New institu-tions will be needed along with increased government responsibilitiesReduced trade restrictions by developed countries as a result of nego-tiations under the auspices of the WTO would also help developingcountries Increased regional economic integration among developingcountries may also play a positive role in some cases

Capital Flows and Foreign AssistanceCapital flows have provided a two-edged sword for many countriesparticularly in Asia and Latin America Capital inflows have helpedstimulate investments and growth particularly in East Asia but haveled to financial crises when outflows occur rapidly over a short periodof time The crisis that spread through East Asia beginning in 1997 had

422


devastating impacts on human welfare and set back progress towarddevelopment in affected countries The world-wide economic crisis thatbegan with the freezing of lending by US and European banks in fall2008 contributed to a deep global recession whose impacts are still be-ing felt Developing countries each must decide upon the appropriatemix of regulations for capital flows fixity of exchange rates and free-dom to adjust macro-economic policies Flawed decisions can lead toeconomic instability and stagnation

Economic development assistance can help relieve short-term foodcrises and can contribute to longer-term development Emergency foodaid is essential for averting famine following natural disasters and ma-jor political upheavals Longer-term financial aid could help to reducethe debt problem in several countries and provide real resources fordevelopment

Aid effectiveness could be improved by longer-term commitmentsand increased donor coordination Less tying of aid to factors such asprocurement from donor sources but increased tying of aid to institu-tional changes that eliminate distortions or reduce transactions costswould help

Coordinated international action has been successful in dealingwith specific development problems International support for agricul-tural research led to productivity increases that enhanced food secu-rity reduced famines in highly populated areas and helped alleviaterural poverty Worldwide immunization efforts coordinated by theWorld Health Organization have significantly reduced deaths due tocommon childhood diseases Concerted efforts to provide food to fam-ine victims have reduced famine mortalities Similar international co-ordination could be effective in reducing debts providing assistancefor policy reforms and for other specific actions Because developmentneeds and the impacts of different interventions vary from country tocountry international actions to promote growth have tended to be lesssuccessful than those used to address specific short-run problems

In summary it is clear that many pieces are needed for a countryto solve its development puzzle Enhanced information flows are vi-tally important for agricultural development More labor-intensive in-dustrial growth is needed in several countries if the employment prob-lem is to be solved

ASSESSING FUTURE PROSPECTSSeveral countries in Asia have grown at relatively rapid rates for al-most three decades (with some short-term financial instability) butmasses of impoverished people still live in Asia Latin American

423


countries that grew in the 1960s and 1970s stagnated in the 1980s andmost of the rsquo90s Most Sub-Saharan African countries have grown veryslowly stagnated or declined for the past 40 years Hunger problemspersist despite increased food production per capita in the world overthe past 50 years Poverty rates have however generally fallen exceptduring 2008ndash09 Environmental problems have grown worse in severalcountries as well What does the future hold for reducing hunger pov-erty population growth and environmental problems Letrsquos considersome of the underlying forces at work

Supply and Demand for FoodThe real price of food in the world trended slightly downward for sev-eral years as supply growth outstripped demand growth Recently realenergy prices have increased raising production costs and incomeshave grown and shifted demands outward in populous countries suchas China and India real world food prices have increased Most ex-perts think that food prices will remain high and volatile through 2010ndash20 although they may not hit the peaks of mid-2008 The major long-run food supply shifters are new technologies and the competition withenergy for use of agricultural resources The major demand shifters arepopulation and income growth As we look to the future populationwill continue to grow but the rate of population growth will fall In-comes have increased rapidly in several Asian countries includingChina with its massive population base Continued income growth islikely Asia has two-thirds of the worldrsquos population and as a regionthe best chance of continued supply increases due to research-inducedtechnical change Food production per capita will likely continue toincrease in Asia but income-based growth in demand is likely to keepfood prices high (Box 20-1) There will be increased diversification awayfrom rice however as diets change with higher incomes In particulardemands for animal proteins are likely to increase with important im-plications for livestock production and marketing systems

In Latin America increased food production per capita is likelybut not at a rapid rate as debt problems continue limiting public in-vestments in agriculture Population growth rates have already declinedfrom their peaks of earlier decades facilitating this per-capita increaseMore urbanization and income growth will have implications for fooddemands and a changing face of marketing and trade in food Overalldemand growth is likely to outstrip supply growth for this region

Unfortunately many Sub-Saharan African countries will continueto experience disease and stagnant per-capita growth in food produc-tion Some increased investments in education and in agricultural

424


research systems have been realized but population growth rates arestill high If small income increases can be realized population growthmay decelerate but environmental problems appear to have alreadydegraded the resource base in parts of the Sahel to the point of reduc-ing productivity AIDS and malaria remain serious health problemsRecently the Gates Foundation has joined other public and private or-ganizations in a concerted attempt to solve these serious health prob-lems but solutions will be difficult and will take time

Institutional ChangesImproved information technologies and infrastructure developmenthave improved information flows in some developing countries These

BOX 20-1THE PROSPECTS for CEREAL TECHNOLOGIES

The spectacular burst in yield potential from new varieties of rice and wheatthat began the Green Revolution has not been repeated Rice yields onexperimental farms have not grown dramatically since the introduction ofIR-8 in 1966 However the difference between yields on the best farmsand the yields on experiment stations has shrunk dramatically since 1970particularly in Asia This reduced difference is due to widespread irrigationhigh application of fertilizer and good management Future gains in riceproduction must come increasingly from rain-fed upland and deep-waterareas unless new biotechnologies provide yield breakthroughs

The prospects for wheat and maize are more optimistic even in theshorter run The Centro de Mejoramiento de Maiz y Trigo (CIMMYT) re-ports a continuing increase in the yield potential of wheat of about onepercent annually Substantial progress has been made toward breeding indisease resistance especially against wheat leaf-rust Yield growth for wheatin less favorable conditions has been less spectacular High-yielding vari-eties for low-rainfall marginal areas are limited and there are virtually nonew varieties for the lowland humid tropics Major break-throughs in theseareas may pave the way for a technology-driven boom in wheat yieldsMaize shows the most promise There is a large gap between experimentstation and farmerrsquos yields and weed control seems to be the critical prob-lem Human-based solutions to weed problems provide opportunities forincreased employment while increasing maize yields

In terms of genetic engineering and other biotechnologies in generalthe outlook is promising but uncertain Many improvements such as in-creased insectdisease and drought resistance are on the horizon butpublic fears about biotechnologies in developed countries have slowed thedevelopment and spread of these technologies in developing countries aswell

425


improvements may create pressures for political and institutionalchanges changes that offer favorable opportunities for developmentReduced transactions costs that result would induce the developmentof technologies that are better suited to the relative resource scarcitiesof the countries More market-oriented policies may continue to createefficiency gains as they have in Asia There is evidence that some gov-ernments in Latin America and Africa have laid the groundwork forthese types of gains as well One factor that has led to food price volatil-ity in recent years has been the small size of food stocks held globallyand in individual countries While it can be inefficient for countries inAfrica to hold large stocks due to storage losses among other factorsevidence seems to indicate that increased holding modest levels of stocksto buffer prices swings may make sense

The willingness of more-developed countries to provide foreignassistance and international institutional changes to help poor coun-tries is constantly in flux Indifference was growing during the 1990samong policy makers in the United States and many other developedcountries The fall of communism in Eastern Europe and the breakupof the Soviet Union a few years ago reduced political pressures on West-ern governments to help developing countries for the purpose of keep-ing those countries out of Soviet influence The heightened focus on theterrorism threat since September 11 2001 has caused many nations tofocus their resources more on countries posing security threats than onattacking more broadly the root causes of poverty and hunger

The relatively wealthy countries of the world must resist isola-tionist temptations Terrorist attacks and threats may help stimulatecountries eventually to seek longer term solutions to problems abroadA long-term goal of promoting democracy and freedom can only beattained through steps to reduce poverty and build economic opportu-nity Many security income hunger and environmental problems re-quire a supra-national decision-making process In order to strengthenthe United Nations agencies that could make these decisions devel-oped countries will need to increase their contributions to official de-velopment assistance

HOW YOU CAN HELPYou as individuals can do a great deal to help solve hunger pov-erty ill health environmental degradation and other developmentproblems Some of you can get involved directly through workingfor grass-roots organizations in developing countries The PeaceCorps is an example in the United States but there are many others Forthose from developed countries spending time living and working in a

426


developing country can greatly improve your understanding of devel-opment problems We are each captive of the pictures in our mind andliving in a developing country provides a more accurate picture of theworld

Getting directly involved in influencing the fortunes of others canbring you a feeling of significance or satisfaction The frustrations ofworking with desperately poor people are many If you are not an opti-mist you may not want to try However if you are adventurous flex-ible and somewhat persistent you may want to consider working at agrass-roots level in a developing country

Some of you can obtain a graduate education to become animalscientists plant breeders plant pathologists entomologists agriculturaleconomists soil scientists microbiologists or some other type of agri-cultural scientist needed to help solve world food income and envi-ronmental problems Employment opportunities exist for rewardingcareers at universities in international agricultural research centersnational research centers and private firms Until the worldrsquos popula-tion stabilizes the battle to keep world food production increasing atroughly 2 to 3 percent per year will continue

Most of you will take very different career paths but the opportu-nity always exists to contribute to solving poverty problems throughfinancial contributions to private voluntary organizations All of youcan strive to keep informed about what is happening in the world

People in developing countries can benefit from grass-roots help

427


outside your state and country You can try to keep politicians informedand let them know that you support foreign assistance contributions tocountries where needs are greatest

SUMMARYIn this chapter but also in the whole book we have stressed the interre-latedness of hunger population and poverty problems There are nopanaceas but a set of interconnected pieces to a development puzzleWe have learned over the years what many of these pieces are Inthis chapter we stressed particularly the importance of enhanced-information flows if broad-based development is to occur Open econo-mies employment-based industrial policies and development policiesthat do not discriminate against agriculture are essential For devel-oped countries now is the time for renewed commitment to findingsolutions to development problems

IMPORTANT TERMS and CONCEPTSAgricultural scientist No panaceaEnhanced information flows Supply and demand shiftersFeeling of significance Supra-national decision-makingGrassroots organization processInterdependence

QUESTIONS for DISCUSSION1 Why might there be room for guarded optimism with respect to

future agricultural and economic development2 Describe the interconnectedness among the pieces that can contrib-

ute to solving the development puzzle3 How has the theory of induced technical and institutional innova-

tion been broadened and why4 What factors can help reduce transactions costs5 Why have relatively open economies grown more rapidly than

relatively closed economics6 What factors will determine the long-run future price of food in the

world7 Why do enhanced information flows offer favorable prospects for

development8 What might you as an individual do to help solve hunger poverty

and other development problems

428


RECOMMENDED READINGPinstrup-Andersen Per and Rajul Pandya-Lorch The Unfinished Agenda

Perspectives on Overcoming Hunger Poverty and Environmental Degrada-tion (Washington DC International Food Policy Research Institute2001)

Runge C Ford Benjamin Senauer Philip G Pardey and Mark WRosegrant Ending Hunger in Our Lifetime Food Security and Globalization(Baltimore Johns Hopkins University Press 2003)

Hunger Task Force Ending Hunger It Can Be Done the Millennium Project(London Earthscan 2005)

429

Glossary of Selected Terms

absolute advantage When one countryrsquos cost of producing a good islower than the cost in other countries

agricultural extension The process of transferring information aboutimproved technologies practices or policies to producers consum-ers or policymakers

agricultural productivity Level of agricultural output per unit of in-put

balance of payments Difference between receipts from all other coun-tries and payments to them including all public and private transac-tions

biased technical change The process of adoption of new means of pro-duction that use one factor more intensively than other factors hold-ing all other things constant

bilateral Two-party or two-country such as aid from one country toanother

biotechnology A set of tools including traditional breeding techniquesthat alter living organisms or parts of organisms to make or modifyproducts improve plants or animals or develop micro-organismsfor specific uses Modern biotechnology includes use of recombinantDNA monoclonal antibodies and novel bio-processing techniquesamong others

birth rates and death rates The number of births or deaths per 1000population in a year

buffer stocks Supplies of a product that are stored and used to moder-ate price fluctuations These stocks are sold during periods of risingprices and purchased when prices fall

capital accumulation Investmentcommon property Property for which the rights of use are shared and

ownership is not private but shared by allcomparative advantage Ability of a country to produce a good or ser-

vice at a lower opportunity cost than another country can The theoryof comparative advantage implies that a country should devote itsresources not to all lines of production but to those it produces mostefficiently

430

concessional Subsidized usually used with respect of interest on loansconsumerproducer surplus Consumer surplus is the area below the

ordinary demand curve and above the price paid it is a measure ofwell-being Producer surplus is the area above the supply curve andbelow the price paid it is a measure of returns to fixed factors ofproduction

debt rescheduling Extending the repayment period for loans alteringinterest rates forgiving part of the principal or some combination ofthe three

demographic transition The historical shift of birth and death ratesfrom high to low levels in a population Death rates usually declinebefore birth rates resulting in rapid population growth during thetransition period

discount rate The value used to determine the present value of futurecash flows arising from a project or an investment

economic development Improvement in the standard of living of anentire population Development requires rising per capita incomeseradication of absolute poverty reduction in inequality over the longterm and increased opportunity of individual choice

economic or structural transformation of an economy The increase inthe size of the nonagricultural sector relative to agriculture that oc-curs in all economies as economic growth occurs

elasticity A measure of the percentage response of one variable (forexample quantity demanded) to a 1 percent change in another vari-able (for example price)

experiment station A center or station at which scientists conduct re-search

external debt Debts owed by the government in one country to credi-tors in another country

externality An economic impact of an activity by an individual or busi-ness on other people for which no compensation is paid Externali-ties may be positive or negative and are often unintentional

foreign assistance or foreign aid Includes financial technical foodand military assistance given by one or several countries to anothercountry This assistance may be given as a grant or subsidized loan

foreign exchange rate The number of units of one currency that it takesto buy a unit of another currency

free rider An individual or business that receives the benefits of theactions of another individual or business without having to pay forthose benefits

free trade area A block of countries that agree to lower or eliminatetariffs and other trade barriers among themselves but each country

GLOSSARY OF SELECTED TERMS

431


maintains its own independent trade policy toward nonmember na-tions

fungibility of credit The degree to which money loaned for one pur-pose can be used for another

General Agreement on Tariffs and Trade (GATT) Multilateral agree-ment originally negotiated in 1947 for the reduction of tariffs andother trade barriers The agreement provides a forum for intergov-ernmental tariff negotiations

globalization The increasing integration of economies around theworld particularly through trade and financial flows Also refersto the movement of people and knowledge across internationalborders

Green Revolution The dramatic increases in wheat and rice harveststhat were achieved in the late 1960s primarily in Asia and LatinAmerica following the release of fertilizer- and water-responsivehigh-yielding semi-dwarf varieties of those crops

high-yielding variety Varieties of plants that have been improvedthrough agricultural research so that they yield more per amount ofinput than the traditional varieties

human capital The level of education skills knowledge health andnutrition of an individual or a population

import substitution Actions by a government to restrict imports of acommodity to protect (from international competition) and encour-age domestic production of the good

induced innovation theory A theory that hypothesizes that technicalchange is induced by changes in relative resource endowments andby growth in product demand institutional change is induced bychanges in relative resource endowments and by technical change

institutions Organizations or rules of society Government policiesregulations and legal systems are examples

integrated pest management The coordinated use of biological cul-tural and chemical pest control practices to reduce insects diseasesand weeds The purpose is to control pests in both an economicallyand an ecologically sound manner

intellectual property rights Laws regulating the copying of inven-tions identifying symbols and creative expressions These laws en-compass four separate and distinct types of intangible property mdashpatents trademarks copyrights and trade secrets

international agricultural research centers (IARCs) The set of agri-cultural research centers supported by a group of public and privatefunding sources These centers provide improved technologies andinstitutional arrangements to help developing countries increase their

432


food production Funding is coordinated by the Consultative Groupon International Agricultural Research (CGIAR)

international capital market The transfers of capital (money) amongcountries in response to short- and long-term investment opportuni-ties

international commodity agreement A formal agreement among themajor producing and consuming countries of a commodity that speci-fies a mechanism for stabilizing price An agreement may specifyimport and export quotas for each country

International Monetary Fund (IMF) An international financial insti-tution designed to (1) promote international monetary coordination(2) foster international trade (3) facilitate stabilization of exchangerates (4) develop mechanisms for multilateral transactions betweenmembers and (5) provide resources for enhanced international fi-nancial stability

land reform An attempt to change the land tenure system throughpublic policies

land tenure The rights and patterns of control over landless developed country (developing country) (LDC) Generally refers

to countries in which per capita incomes are below $6000 althougha few countries with higher incomes consider themselves to be lessdeveloped or developing

market failure When markets fail to efficiently organize production orallocate goods in a way that maximizes social welfare

micro-finance Small-scale provision of credit savings and insuranceservices usually to the very poor

moneylender An informal lender whose business it is to lend moneyto borrowers usually at high interest with little or no collateral orpaperwork

money supply Currency plus money that can be easily withdrawn fromchecking or savings accounts

monopoly power When a single seller or united group of sellers hasthe power to alter the market price as opposed to having to just ac-cept the market price

monopsony A market with a single buyermultilateral Refers to many countries as opposed to two countries (bi-

lateral) Examples are multilateral aid multilateral trade and multi-lateral agreements

multiple exchange rates When a country sets different rates betweenits currency and foreign currencies depending on the class of im-ports May be used to control foreign exchange by limiting certaintypes of imports

433


Official Development Assistance (ODA) Foreign assistance that ex-cludes military related assistance export credits and private fundtransfers while having at least a 25 percent grant element The grantelement is defined as the excess of the loan or grantrsquos value over the(present) value of repayments calculated with a 10 percent interestrate

opportunity cost of capital The rate of return on the best alternativeuse for the funds It is the cost of alternative investments forgonewhen a particular investment is made

overvalued exchange rate When the official value of a currency is toohigh given the exchange rate that would otherwise prevail in inter-national money-markets given the supply and demand for thecountryrsquos currency

parastatal An institution such as a marketing board that is used by agovernment to control the production distribution internationaltrade and domestic price of a product This product might be anagricultural good or an input such as fertilizer

production function Describes for a given technology the differentoutput levels that can be obtained from various combinations of in-puts or factors of production

production possibilities frontier The trade-off between the maximumamount of two goods that can be produced in a country given exist-ing production technologies and the available productive resources

protectionism A reaction by an industry or a country to foreign com-petition That reaction is usually manifest through tariffs quotas orother means of reducing imports to shield domestic producers

public goods Goods or services that are non-rival (consumption or useby one person does not preclude consumption by another) and non-exclusive (a person cannot be excluded from consumption or useexcept at prohibitively high costs)

scale-neutral technology A technology that can be employed equallywell by any size firm

social cost The total value of resources used in production of a goodincluding the value of externalities which are not borne by the pro-ducer of the good or reflected in the market price

structural adjustment program Government program aimed at adjust-ing the economy to reduce imbalances between aggregate supply anddemand Structural adjustment programs typically involve devalu-ation of the foreign exchange rate to increase exports and reduceimports reduced government spending and removal of many gov-ernment policies that distort prices including barriers to trade

434

subsidized (concessional) credit Loans made with interest rates be-low the rates prevailing in the market

sustainable development Development that meets the needs of thepresent without compromising the ability of future generations tomeet their own needs

tariff A tax or duty placed on goods imported into a countrytechnology The method for producing something New technologies

are often embedded in inputs for example seeds or machines Hencehigher-yielding seeds or more efficient machines are often referredto as improved technologies Technological progress occurs whenmore output is obtained from the same quantity of inputs Technol-ogy transfer occurs when methods (perhaps embedded in materials)from one location are applied in a second location

terms of trade The relationship between the prices of two goods thatare exchanged for example the price of an export good relative tothe price of an import good When the price of an export good in-creases relative to the price of an import good the terms of tradehave increased for the export and are said to be favorable

trade preferences Refers to favorable tariff treatment accorded by onecountry or group of countries to exports of certain other countries

transactions costs The costs of adjustment of information and of ne-gotiating monitoring and enforcing contracts

World Bank The major multilateral-funded organization that makesloans to developing countries It contains the International FinanceCorporation the International Bank for Reconstruction and Devel-opment and the International Development Association

World Trade Organization (WTO) The international institution cre-ated in 1994 to replace the GATT and strengthen enforcement of in-ternational trade rules and the settling of trade disputes


435

Authors CitedPage numbers followed by

b mdash indicate material in boxesf mdash indicate material in figuresn mdash indicate material in footnotest mdash indicate material in tables

Achard Freacutedeacuteric 167Acharya Meena 192Adams Dale W 294 297 299 300Ahmed Raisuddin 314t 317Alston Julian M 230 232t 234 259Alwang Jeffrey 46 137 145 285bAnderson Kym 111 323 332 339 342

343 348 356 364Anderson S 138Angelsen Arild 174Asturias de Barros Linda 192 194bBaker Doyle C 193b 203Bardham P 291Barro Robert J 401Baumol William J 218Baxter Michael 255 259Beitema Nienke 254 259Bell Clive 270 280Bellu Lorenzo Giovanni 184Benjamin Dwayne 269Bennett Lynn 192Bennett M K 15 50Benor Daniel 255 259Berry Albert 280Bezuneh Mesfin 35f 152fBigot Yves 299Binswanger Hans P 217b 250 280

286 299Boserup Ester 154b 203Bouman F J A 299Braverman Avishay 268bBromley Daniel W 174 175Brooks Karen 268bBrown Lynn R 185 204Burnside Craig 405

Byerlee Derek 323Chan-Kang Connie 230 232t 317 323Chapagain Devendra P 175Chase Robert 410Chen Shaohua 29Christensen Cheryl 51tCistulli Vito 184Cline William R 280 327 356 364Cohen Benjamin J 392Collier Paul 414Colman David 111 336b 348Conklin Neilson 93fCourbois C 140Csaki Csaba 268bCummings Ralph W Jr 280 281Dalgaard Carl-Johan 405Davie Ted J 168de Janvry Alain 218 265 274 280 406de Waal A 200Deaton Angus 55 57bDeere Carmen D 203Dehmer Steven 254 259Deininger Klaus 274 280del Ninno Carlo 40 45Delgado C 140Dercon Stephan 193Diaz-Bonilla Eugenio 349Dimitri Carolyn 93fDixon John 145Dollar David 405Donald Gordon 300Doss Cheryl 197Duckham Alec N 149 150 160Duncan A J 138Easterly William 414

436

AUTHOR INDEX

Edirisinghe Neville 41Effland Anne 93fEhui S 140Eicher Carl K 24 160Ellis F 145Erbaugh Mark 192 194bEva Hugh D 167Evenson Robert E 250 319 323ndash4Fafchamps Marcel 218 274Falcon Walter P 3 324 365 368f 370Fan Shenggen 317 323Feder Gershon 280Feldstein Hilary Simms 185 193b 203

204Flores Rafael 45Fogel Robert 107Folbre Nancy 203Folmer H 184Foster A 277Foster Phillips 45 68Gallego Javier 167Gandhi Vasant P 235Garcia Andres F 342Gardner Bruce L 111 187Gavian Sarah 45Gelbard Arlene 85Gibbon David 145Giovannucci Daniele 337Gillespie Stuart 45Gittinger J Price 37 203 301 312 323

378Gladwin Christine H 203Glewwe Paul 186 204Graham Carol 351Graham Douglas H 299Grosh Margaret 40 45Guasch J Luis 268bGulliver Aidan 145Haddad Lawrence 185 193 204Hamilton Sarah 192 194bHareau Guy 245Harou Patrice 184Harris Colette 192 194bHarrison James A 255 259Haub Carl 85Hayami Yujiro 128 145 207ndash15 217b

225 250 252 293 299 323Heinrichs E A 176 192 194 285bHansen Henrik 405Herrero M 138Hertel Thomas 339

Hicks John R 212Hoisington Caroline 37 203 301 312

323 378Hopper W David 145Hossain Mahabub 292 299 317Houck James P 406Houtman R 299Irwin Michael E 176 192 194 285bJames Clive 245Jin Songquing 274 280Johnson D Gale 348Johnston Bruce F 47Joyce Joseph 389 392Juggins Janice 192 195Junhua Ehou 156bKaimowitz David 174Keeney Roman 339Kent Mary M 85Khandker Shahidur 292Kikuchi Masao 217bKoppel Bruce M 225Krishnan Pramila 193Krueger Anne O 323 394 397 404Krugman P 387bKu-Vera J C 138Lancaster Carol 414Landsburg Steven 112 113Lapenu Cecile 295 296Leathers Howard D 45 68Leaver J D 138Leslie Joanne 37 203 302 312 323 378Levinsohn James 411Lewin Bryan 337Lin Justin Y 156b 160Lin Lin 405Lipton Michael 38Loomis Robert S 146Luther Gregory C 176 192 194 285bMacMillian Margaret 411Maddison Angus 89Mahar Dennis J 179bMaimbo Samuel Munzele 398bMalingreau Jean-Paul 167Markandaya Anil 184Markandaya Kamala 25Marra Michele C 230 232tMartin Will 339 348 356 364Martorell Reynaldo 193Masefield G B 149 150 160Masters William A 259 273b 332 342Maxwell S T 411

437

AUTHOR INDEX

Mayaux Philippe 167McCleary Rachel 401McMillan Della 203Mellor John W 45 47 58 60t 68 131

314tMeyer Richard L 289 300Meyers Norman 163 164Michalopoulos Constantine 404Mills Bradford 245Moore Keith 192 194bMorrison Elizabeth 399

Ndiaye Aida 193Norman David W 145North Douglas C 128 218 223 225Norton George W 176 192 194 234

245 259 285b 405Obstfeld M 387bOlson Mancur Jr 128Ortiz Jaime 405Ouerghi Azedine 40 45Owen E 138Palomino Julio 233bPandya-Lorch Rajul 45 185 428Pardey Philip G 24 68 69 230 232t

234 254 259 405 428Pearce David W 184Pearson Scott R 3 324 365 368fPentildea Christina 185 204Peterson Everett 245Piesse Jenifer 405Pingali Prabhu 299 319 323ndash4Pinstrup-Andersen Per 45 185 245

259 306t 307 323 428Pitt Mark M 292Plucknett Donald L 236bPoats Susan V 203Posada Rafael T 235 259Puetz Detlev 55 198Purcell Randall B 399Quisumbing Agnes 185 204Ramakrishnan Usha 193Rangnekar D 138Ratha Dilip 398bRaup Philip M 260Rausser Gordon 187Ravallion Martin 28b 29Ray Debraj 280Reardon Thomas 319 320 323Repetto Robert 168Reynolds C K 138

Richards I 138Richards Timothy 167Riddell Roger 414Roberts Colleen 410Robinson Marguerite S 295 299Robinson Sherman 349Rogoff Kenneth 392Rosegrant Mark W 24 68 69 140 428Rosenzweig Mark R 217b 277Rosero Joseacute 197Rudra A 291Runge C Ford 24 68 69 428Ruthernberg Hans 160Ruttan Vernon W 111 128 207ndash15

225 226 250 252 259 293 299 394404

Sachs Carolyn 192 194bSachs Jeffrey 112 113 284 300 393 405

414 417Sadoulet Elisabeth 218 274 406Sahn David E 135Sain Gustavo 323Sangraula Prem 29Sarma J S 51t 235Schady Norbert 197Schiff Maurice 323Schioler Ebbie 245 259Schramm Gunter 161 164 179b 184 Schuh G Edward 378Schultz T Paul 187 319 323ndash4Schultz Theodore W 136 145 187 211

227Scobie Grant M 235 259Sen Amartya K 31b 45Senauer C Benjamin 24 68 69 428Sfeirounis Alfredo 163Sharma Shalendra 405Shirmer Isabelle A 168Siegel Paul B 46 137 145 337Singer H W 411Skjonsberg Else 145Smith Lisa C 193Smith T 138Spriggs John 317Staatz John M 24 160Steele M A 138Steinfeld H 140Stibig Hans-Juumlrgen 167Stiglitz Joseph 405Streeten Paul 324Sukhatme Vasant 404

438

AUTHOR INDEX

Tanzo Irene 192 194bTarp Finn 405Tesliuc Emil 40 45Thirlwall A P 111Thirtle Colin 405Thomas D 138Thorbecke E 28Tietenberg T H 184Timmer C Peter 3 301 304 312 319

320 323 324 365 368f 370Todaro Michael P 24Truman Harry S 399Turner R Kerry 184Valdes Alberto 323Varangis Panos 337Vink N 111von Braun Joachim 55 68 198 335 415

Von Pischke J D 299 300Von Thunen Heinrick 210nWalsh John 239bWarford Jeremy J 161 164 179b 184Webb Patrick 198White T Kelley 406Whiteside A 200Wigley Tom M L 168Williamson Oliver 226Wilson E O 168Wolgin J M 145Wood Stanley 254 259Wortman Sterling 280 281Wyatt T J 230 232tYaron Jacob 300Young Trevor 336b 348Zeller Manfred 289 295 296 300

Internet sourceshttpstats oecd orgqwidshttpusdamannlibcornelledureportserssorfieldrcs-bbyrcs2001pdfhttpwwwprborghttpwwwifpriorgindex1htmhttpwwwprborgPublicationsDatasheets20082008wpdsaspxhttpwwwifpriorgpubsbpbp001pdf

439

Works CitedAcharya Meena and Lynn Bennett ldquoWomen and the Subsistence Sector Economic

Participation and Household Decision Making in Nepalrdquo World Bank StaffWorking Paper Number 526 Washington DC World Bank 1982

Achard Freacutedeacuteric Hugh D Eva Hans-Juumlrgen Stibig Philippe Mayaux JavierGallego Timothy Richards and Jean-Paul Malingreau ldquoDetermination ofDeforestation Rates of the Worldrsquos Humid Tropical Forestsrdquo Science 9 August2002 (vol 297 no 5583) pp 999ndash1002

Adams Dale W ldquoThe Conundrum of Successful Credit Projects in FlounderingRural Financial Marketsrdquo Economic Development and Cultural Change vol 36(January 1988)

________ Douglas H Graham and J D Von Pischke eds Undermining RuralDevelopment with Cheap Credit Boulder Colo Westview Press 1984

Ahmed Raisuddin and Mahabub Hossain Developmental Impact of Rural Infra-structure in Bangladesh International Food Policy Research Institute ResearchReport No 83 Washington DC October 1990

Alston Julian M Connie Chan-Kang Michele C Marra Philip G Pardey and TJWyatt ldquoA Meta-Analysis of Rates of Return to Agricultural RampDrdquo IFPRIResearch Report 113 Washington DC International Food Policy ResearchInstitute 2000

________ George W Norton and Philip G Pardey Science Under Scarcity Principlesand Practice for Agricultural Research Evaluation and Priority Setting Ithaca NYCornell University Press 1995

Anderson Kym Distortions to Agricultural Incentives A Global Perspective 1955 to2007 New York and Washington Palgrave Macmillan and the World Bank2009

________ ldquoOn Why Agriculture Declines with Economic Growthrdquo AgriculturalEconomics vol 3 no 1 (October 1987) pp 195ndash207

________ ed Political Economy of Distortions to Agricultural Incentives WashingtonDC The World Bank 2009

________ and Yujiro Hayami The Political Economy of Agricultural ProtectionSydney Allen and Unwin 1986

________ and Will Martin eds Agricultural Trade Reform and the Doha DevelopmentAgenda Washington DC The World Bank 2005

________ and William A Masters eds Distortions to Agricultural Incentives in AfricaWashington DC The World Bank 2008

Angelsen Arild and David Kaimowitz ldquoRethinking the Causes of DeforestationLessons from Economic Modelsrdquo The World Bank Research Observer vol 14 no1 (February 1999) pp 73ndash98

Bardham P and A Rudra ldquoInterlinkage of Hand Labor and Capital Relations AnAnalysis of Village Survey Data in East Asiardquo Economic and Political Weekly(1978) pp 367ndash84

440

WORKS CITED

Bell Clive ldquoReforming Property Rights in Land and Tenancyrdquo World Bank ResearchObserver vol 5 (July 1990) pp 143ndash66

Benjamin Dwayne ldquoCan Unobserved Land Quality Explain the Inverse Productiv-ity Relationshiprdquo Journal of Development Economics vol 46 (1995) pp 51ndash84

Bennett M K ldquoInternational Disposition in Consumption Levelsrdquo AmericanEconomic Review vol 41 (September 1951) pp 632-49

Benor Daniel James A Harrison and Michael Baxter ldquoAgricultural Extension TheTraining and Visit Systemrdquo World Bank Washington DC 1989

Berry Albert and William Cline Agrarian Structure and Productivity in DevelopingCountries Baltimore Johns Hopkins University Press 1979

Bill and Melinda Gates Foundation Annual Report 2007 available online atwwwgatesfoundationorg

Binswanger Hans P ldquoAgricultural Mechanization A Comparative HistoricalPerspectiverdquo World Book Research Observer vol 1 (January 1986) pp 27ndash56

________ and Mark R Rosenzweig eds Contractual Arrangements Employment andWages in Rural Labor Markets in Asia New Haven Conn Yale University Press1984

________ and Vernon W Ruttan eds Induced Innovation Technology Institutionsand Development Baltimore Johns Hopkins University Press 1978

Boserup Ester The Conditions of Agricultural Growth London Allen and Unwin1965

________ Womenrsquos Role in Economic Development London Allen and Unwin 1970Bouman F J A and R Houtman ldquoPawnbrokering as an Instrument of Rural

Banking in the Third Worldrdquo Economic Development and Cultural Change vol 37(October 1988) pp 69ndash99

BRAC BRAC at a Glance March 2009 Available online at wwwbracnetBromley Daniel W ed Making the Commons Work San Francisco Institute for

Contemporary Studies Press 1992________ and Devendra P Chapagain ldquoThe Village Against the Center Resource

Depletion in South Asiardquo American Journal of Agricultural Economics vol 68(December 1984) pp 868ndash73

Brooks Karen J Luis Guasch Avishay Braverman and Csaba Csaki ldquoAgricultureand the Transition to Marketrdquo Journal of Economic Perspectives vol 5(4) Fall1991 pp 149ndash62

Burnside Craig and David Dollar ldquoAid Policies and Growthrdquo American EconomicReview vol 90 (September 2000) pp 775ndash86

Byerlee Derek and Gustavo Sain ldquoFood Pricing Policy in Developing CountriesBias Against Agriculture or for Urban Consumersrdquo American Journal of Agricul-tural Economics vol 68 (November 1986) pp 961ndash9

CGIAR Science Council Science for Agricultural Development Changing Contexts andNew Opportunities Rome Italy Science Council Secretariat 2005

Christensen Cheryl et al Food Problems and Prospects in Sub-Saharan Africa TheDecade of the 1980rsquos US Department of Agriculture Economic ResearchService Foreign Agricultural Research Report No 186 Washington DCAugust 1981

Cline William R Trade Policy and Global Poverty Washington DC Institute forInternational Economics 2004

Cohen Benjamin J ldquoWhat Ever Happened to the LDC Debt Crisisrdquo Challenge vol34 (May-June 1991) pp 47ndash51

Collier Paul The Bottom Billion New York Oxford University Press 2008

441

WORKS CITED

Colman David and N Vink Reshaping Agriculturersquos Contributions to Society OxfordUK Blackwell Publishing 2005

________ and Trevor Young Principles of Agricultural Economics Markets and Pricesin Less Developed Countries Cambridge Cambridge University Press 1989

Dalgaard Carl-Johan Henrik Hansen and Finn Tarp ldquoOn The Empirics of ForeignAid and Growthrdquo The Economic Journal vol 114 no 496 (June 2004) pp F191ndashF216

Davie Ted J and Isabelle A Shirmer ed Sustainability Issues in AgriculturalDevelopment Washington DC World Bank 1987

de Janvry Alain ldquoThe Role of Land Reform in Economic Development Policies andPoliticsrdquo American Journal of Agricultural Economics vol 63 (May 1981) pp 384ndash92

________ Marcel Fafchamps and Elisabeth Sadoulet ldquoPeasant Household Behaviorwith Missing Markets Some Paradoxes Explainedrdquo Economic Journal vol 101no409 (1991) 1400ndash17

________ Elisabeth Sadoulet and T Kelley White ldquoForeign Aidrsquos Effect on U SFarm Exportsrdquo U S Department of Agriculture Economic Research ServiceForeign Agricultural Economic Report Number 238 Washington DC Novem-ber 1989

de Waal A and A Whiteside ldquoNew variant famine AIDS and food crisis insouthern Africardquo The Lancet vol 362 October 11 2003

Deaton Angus The Analysis of Household Surveys Baltimore Johns Hopkins Univer-sity Press 1997

Deere Carmen D ldquoThe Division of Labor by Sex in Agriculture A Peruvian CaseStudyrdquo Economic Development and Cultural Change vol 30 1982 pp 795ndash811

Deininger Klaus and Hans Binswanger ldquoThe Evolution of the World Bankrsquos LandPolicy Principles Experience and Future Challengesrdquo World Bank ResearchObserver vol 14 no 2 (August 1999) pp 247ndash76

________ and Songquing Jin ldquoLand Sales and Rental Markets in TransitionEvidence from Rural VietnamrdquoOxford Bulletin of Economics and Statistics vol 70(February 2008) pp 67ndash101

________ and ________ldquoTenure Security and Land-Related Investment Evidencefrom Ethiopiardquo European Economic Review vol 50 (July 2006) pp 1245ndash77

Delgado C M Rosegrant H Steinfeld S Ehui and C Courbois ldquoLivestock to2020 the next food revolutionrdquo Food Agriculture and the EnvironmentDiscussion Paper 28 IFPRIFAOILRI Washington DC USA 1999

Dercon Stephan and Pramila Krishnan ldquoIn Sickness and in Health Risk Sharingwithin Households in Rural Ethiopiardquo Journal of Political Economy vol 108 no4 (August 2000) pp 688ndash727

Dias Bonilla Eugenio and Sherman Robinson ldquoThe WTO can Help Worldrsquos PoorFarmersrdquo International Herald Tribune March 38 2001

Dimitri Carolyn Anne Effland and Neilson Conklin The 20th Century Transforma-tion of US Agriculture and Farm Policy Washington DC Economic ResearchService USDA 2005

Dixon John and Aidan Gulliver with David Gibbon Farming systems and povertyimproving farmersrsquo livelihoods In a changing world Rome and Washington DCFAO and the World Bank 2001

Doss Cheryl ldquoThe effects of intrahousehold property ownership on expenditurepatterns in Ghanardquo Journal of African Economies vol 15 (1) (2005) pp 149ndash80

Duckham Alec N and G B Masefield Farming Systems of the World LondonChatto and Windus 1970

442

WORKS CITED

Easterly William The Elusive Quest for Growth Cambridge MIT Press 2002Edirisinghe Neville ldquoThe Food Stamp Scheme in Sri Lanka Costs Benefits and

Options for Modificationrdquo International Food Policy Research InstituteResearch Report No 58 Washington DC March 1987

Eicher Carl K and John M Staatz eds International Agricultural DevelopmentBaltimore Johns Hopkins University Press 1998

Ellis F Rural Livelihoods and Diversity in Developing Countries Oxford OxfordUniversity Press 2000

Evenson RE PPingali and TP Schultz eds Handbook of Agricultural EconomicsVolume 3 Agricultural Development Farmers Farm Production and Food Marketsed AmsterdamElsevier 2006

Fan Shenggen and Connie Chan-Kang Road Development Economic Growth andPoverty Reduction in China International Food Policy Research InstituteResearch Report No 138 Washington DC 2005

FAO Production Yearbook various years USDA Economic Research Service RiceOutlook and Situation Outlook Yearbook 2001

FAOSTAT data 2002 2005FAOTAT 2009 for years through 2006Feder Gershon and Klaus Deininger ldquoLand Institutions and Land Marketsrdquo World

Bank Policy Research Working Paper Series 2014 1999Feldstein Hilary Simms and Susan V Poats eds Working Together Gender Analysis

in Agriculture Vol I Case Studies West Hartford Conn Kumarian Press 1989Flores Rafael and Stuart Gillespie Health and Nutrition Emerging and Reemerging

Issues in Developing Countries IFPRI 2020 Vision Focus 5 February 2001Fogel Robert National Bureau of Economic Research Working Paper 9771 June

2003Folbre Nancy ldquoEngendering Economics New perspectives on Women Work and

Demographic Changerdquo Annual World Bank Conference on Development TheWorld Bank Washington DC 1995

Food and Agricultural Organization of the United Nations 2006 Global ForestResources Assessment Progress toward sustainable forest management FAOForestry Paper 147 Rome 350 pp

________ State of Food and Agriculture 2008 Rome FAO 2008Foster A and M Rosenzweig ldquoA Test for Moral Hazard in the Labor Market

Contractual Arrangements Effort and Health Review of Economics and Statisticsvol 76 (1994) 213ndash27

Foster J J Greer and E Thorbecke ldquoA Class of Decomposable Poverty MeasuresrdquoEconometrica Volume 52 (1984)

Foster Phillips and Howard D Leathers The World Food Problem Boulder Colo-rado Lynne Reinner Publishers 1999

Gardner Bruce L and Gordon C Rausser eds Handbook of Agricultural EconomicsNew York Elsevier 2001

Gelbard Arlene Carl Haub and Mary M Kent ldquoWorld Population Beyond SixBillionrdquo Population Bulletin vol 54 No1 Population Reference Bureau March1999

Gittinger J Price Joanne Leslie and Caroline Hoisington eds Food Policy Interact-ing Supply Distribution and Consumption Baltimore Johns Hopkins UniversityPress 1987

Gladwin Christine H and Della McMillan ldquoIs a Turnaround in Africa PossibleWithout Helping African Women to Farmrdquo Economic Development and CulturalChange vol 387 1989 pp 305ndash44

and

443

Glewwe Paul ldquoSchools and Skills in Developing Countries Education Policies andSocioeconomic Outcomesrdquo Journal of Economic Literature vol 40 (2) June 2002pp 436ndash82

Graham Carol Safety Nets Politics and the Poor Washington DC The BrookingsInstitution 1994

Grosh Margaret Carlo del Ninno Emil Tesliuc and Azedine Ouerghi For Protec-tion and Promotion The design and implementation of effective safety nets Washing-ton DC The World Bank 2008

Haggblade Steven Peter Hazell and Thomas Reardon Strategies for Stimulating Pov-erty-Alleviating Growth in the Rural Nonfarm Economy in Developing CountriesEPTD Discussion Paper No 93 International Food Policy Research Institute 2002

Hareau Guy George Norton Bradford Mills and Everett Peterson ldquoPotentialBenefits of Transgenic Rice in Asia A General Equilibrium Analysisrdquo QuarterlyJournal of International Agriculture vol 44 (2005) pp 229ndash46

Hayami Yujiro Anatomy of a Peasant Economy A Rice Village in the Philippines LosBanos Laguna Philippines International Rice Research Institute 1978

________ and Vernon W Ruttan Agricultural Development An International Perspec-tive Baltimore Johns Hopkins University Press 1985

Hicks John R Theory of Wages London MacMillan and Co 1932Hopper W David ldquoAllocation Efficiency in a Traditional Indian Agriculturerdquo

Journal of Farm Economics vol 47 (1965) pp 611ndash25Hossain Mahabub ldquoCredit for Alleviation of Rural Poverty The Grameen Bank of

Bangladeshrdquo International Food Policy Research Institute Research Report No65 Washington DC February 1988

Houck James P ldquoLink Between Agricultural Assistance and Agricultural TraderdquoAgricultural Economics vol 2 (October 1988) pp 158ndash66

The Hunger Project Ending Hunger An Idea Whose Time Has Come New YorkPraeger 1985

Hunger Task Force Ending Hunger It Can Be Done The Millennium Project Lon-don Earthscan 2005

IMF International Financial Statistics 2009International Food Policy Research Institute PROGRESA mdash Breaking the Cycle of

Poverty Washington DC IFPRI 2002Islam Nurul ldquoThe Nonfarm Sector and Rural Development Review of Issues and

Evidencerdquo 2020 Discussion Paper No 22 International Food Policy Research Insti-tute 1997

James Clive Global Status of Commercialized BiotechGM Crops 2008 ISAAA Brief No39 Ithaca NY ISAAA 2008

Johnson D Gale World Agriculture in Disarray 2nd ed New York St Martinrsquos Press1991

Joyce Joseph ldquoThe IMF and Global Financial Crisesrdquo Challenge vol 43 (July-August 2000) pp 88ndash107

Juggins Janice ldquoGender-Related Impacts and the Work of the International Agricul-tural Research centersrdquo Consultative Group for International AgriculturalResearch (CGIAR) Study Paper Number 17 World Bank Washington DC1986

Junhua Ehou ldquoEconomic Reform Price Readjustment (1978ndash87)rdquo Chinese EconomicStudies vol 24 (3) Spring 1991 pp 6ndash26

Koppel Bruce M ed Induced Innovation Theory and International AgriculturalDevelopment A Reassessment Baltimore and London Johns Hopkins UniversityPress 1995

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444

Krueger Anne O ldquoAid in the Development Processrdquo World Bank Research Ob-server vol 1 (January 1986) pp 57ndash8

________ Constantine Michalopoulos and Vernon W Ruttan ed AID and Develop-ment Baltimore Md Johns Hopkins University Press 1989

________ Maurice Schiff and Alberto Valdes ldquoAgricultural Incentives in Develop-ing Countries Measuring the Effects of Sectoral and Economywide PoliciesrdquoWorld Bank Economic Review vol 2 (September 1988) pp 255ndash71

Krugman P and M Obstfeld International Economics Cambridge MassachusettsInstitute of Technology Press 1988

Lancaster Carol Foreign Aid Diplomacy Development Domestic Politics ChicagoUniversity of Chicago Press 2007

Lansburg Steven The Armchair Economist Economics and Everyday Life New YorkFree Press 1995

Lapenu Cecile and Manfred Zeller Distribution Growth and Performance ofMicrofinance Institutions in Africa Asia and Latin America IFPRI FCNDDiscussion Paper 114 Washington DC2001

Levinsohn James and Margaret MacMillian ldquoDoes Food Aid Harm the PoorHousehold Evidence from Ethiopiardquo National Bureau of Economic ResearchInc NBER Working Papers 11048 (2005)

Lin Justin Y ldquoThe Household Responsibility System Reform and the Adoption ofHybrid Rice in Chinardquo Journal of Development Economics vol 36 (2) 1991 pp353ndash73

Loomis Robert S ldquoAgricultural Systemsrdquo Scientific American September 1976 p 69Maddison Angus Economic Progress and Policy in Developing Countries New York

W W Norton and Co 1970Maimbo Samuel Munzele and Dilip Ratha Remittances Development Impact and

Future Prospects Washington DC World Bank 2005Markandaya Anil Patrice Harou Lorenzo Giovanni Bellu and Vito Cistulli

Environmental Economics for Sustainable Growth Northhampton Mass EdwardElgar 2002

Markandaya Kamala Nectar in a Sieve New York New American Library 1954Masters William A Government and Agriculture in Zimbabwe Westport Conn

Praeger 1994________ ldquoPaying for Prosperity How and Why to Invest in Agricultural Research

and Development in Africardquo Journal of International Affairs vol 58(2 2005) pp35ndash64

Maxwell ST and H W Singer ldquoFood Aid to Developing Countries A SurveyrdquoWorld Development vol 7 (1979) pp 223ndash47

McCleary Rachel and Robert J Barro ldquoPrivate Voluntary Organizations Engaged inInternational Assistance 1939ndash2004rdquo Nonprofit and Voluntary Sector Quarterlyvol 37 no 3 (September 2008) pp 512ndash36

Mellor John W Economics of Agricultural Development Ithaca NY Cornell Univer-sity 1966

________ and Raisuddin Ahmed eds Agricultural Price Policy for DevelopingCountries Baltimore Johns Hopkins University Press 1988

________ and Sarah Gavian ldquoFamine Causes Prevention and Reliefrdquo Science vol235 (January 1987) pp 539ndash45

________ and Bruce F Johnston ldquoThe World Food Equation Interrelations amongDevelopment Employment and Food Consumptionrdquo Journal of EconomicLiterature vol 22 (June 1984) p 533

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Morrison Elizabeth and Randall B Purcell Players and Issues in US Foreign AidWest Hartford Conn Kumarian Press 1988

Munzele Maimbo Samuel and Dilip Ratha Remittances Development Impact andFuture Prospects Washington DC World Bank 2005

North Douglas C ldquoInstitutions Transactions Costs and Economic GrowthrdquoEconomic Inquiry vol 25 (1987) pp 415ndash8

Norton George W E A Heinrichs Gregory C Luther and Michael E Irwin edsGlobalizing Integrated Pest Management A Participatory Research Process AmesIowa Blackwell Publishing 2004

________ Jaime Ortiz and Philip G Pardey ldquoThe Impact of Foreign Assistance onAgricultural Growthrdquo Economic Development and Cultural Change vol 40 (July1992) pp 775ndash86

________ Philip G Pardey and Julian Alston Science Under Scarcity Principles andPractice for Agricultural Research Evaluation and Priority Setting Ithaca NYCornell University Press 1995

OECD database Development Cooperation Report 2008OECD International Development Statistics databaseOlson Mancur Jr ldquoBig Bills Left on the Sidewalk Why Some Nations Are Rich and

Others Are Poorrdquo Journal of Economic Perspectives vol 10 (Spring 1996) pp 3ndash24

Owen E T Smith M A Steele S Anderson A J Duncan M Herrero J DLeaver C K Reynolds I Richards J C Ku-Vera eds ldquoResponding to thelivestock revolution the role of globalisation and implications for povertyalleviationrdquo British Society of Animal Science Publication 33 NottinghamUniversity Press 2004

Pardey Philip G Nienke Beitema Steven Dehmer and Stanley Wood AgriculturalResearch A Growing Divide Washington DC IFPRI 2006

Pearce David W and R Kerry Turner Economics of Natural Resources and theEnvironment Baltimore Johns Hopkins University Press 1990

Pingali Prabhu Yves Bigot and Hans P Binswanger Agricultural Mechanization andthe Evolution of Farming Systems in Sub-Saharan Africa Baltimore Johns HopkinsUniversity Press 1987

Pinstrup-Andersen Per Food Subsidies in Developing Countries Baltimore JohnsHopkins University Press 1988

________ and Rajul Pandya-Lorch The Unfinished Agenda Perspectives on OvercomingHunger Poverty and Environmental Degradation International Food PolicyResearch Institute Washington DC 2001

________ and Ebbie Schioler Seeds of Contention Baltimore Johns Hopkins Univer-sity Press 2000

Pitt Mark M and Shahidur Khandker ldquoThe Impact of Group-based Credit Pro-grams on Poor Households in Bangladesh Does the Gender of ParticipantsMatterrdquo Journal of Political Economy (1998) pp 958ndash96

Plucknett Donald L ldquoSaving Lives Through Agricultural Researchrdquo ConsultativeGroup on International Agricultural Research Issues in Agriculture Paper No1 ( Washington DC May 1991) pp 9ndash10

Population Division of the Department of Economic and Social Affairs of the UnitedNations Secretariat World Population Prospects The 2004 Revision

Population Reference Bureau Inc 2008 World Population Data SheetQuisumbing Agnes R Lynn R Brown Hillary Simms Feldstein Lawrence

Haddad and Christina Pentildea ldquoWomen the Key to Food Securityrdquo InternationalFood Policy Research Institute Washington DC August 1995

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Raup Philip M ldquoLand Reform Issues in Developmentrdquo Staff Paper P75-27 Depart-ment of Agricultural and Applied Economics University of Minnesota St Paul1975

Ravallion Martin ldquoPoverty comparisons A guide to concepts and methodsrdquoLiving Standards Measurement Study Working Paper no 88 WashingtonDC World Bank 1992

________ Shaohua Chen and Prem Sangraula ldquoNew Evidence on the Urbanizationof Global Povertyrdquo Policy Research Working Paper forthcoming World Bank2007

Ray Debraj Development Economics Princeton Princeton University Press 1998Riddell Roger Does Foreign Aid Really Work Oxford Oxford University Press 2007Roberts Colleen ed Trade Aid and Policy Reform Washington DC World Bank

1988Robinson Marguerite S The Micro Finance Revolution Sustainable Finance for the Poor

Washington DC The World Bank 2001Rogoff Kenneth ldquoInternational Institutions for Reducing Global Financial Instabil-

ityrdquo Journal of Economic Perspectives vol 13 Fall 1999Runge C Ford Benjamin Senauer Philip G Pardey and Mark W Rosegrant

Ending Hunger in Our Lifetime Food Security and Globalization Baltimore JohnsHopkins University Press 2003

Ruthernberg Hans Farming Systems in the Tropics Oxford Oxford University Press1980

Ruttan Vernon W Agricultural Research Policy Minneapolis University of Minne-sota Press 1982

________ ldquoProductivity Growth in World Agriculture Sources and ConstraintsrdquoJournal of Economic Perspectives vol 16 (Fall 2002) pp 161ndash84

________ ldquoSolving the Foreign Aid Vision Thingrdquo Challenge vol 34 (May-June1991) p 46

________ Technology Growth and Development An Induced Innovation PerspectiveOxford Oxford University Press 2001

________ United States Development Assistance Policy Baltimore Johns-Hopkins1996

Sachs Jeffrey D Common Wealth Economics for a Crowded Planet New York PenguinBooks 2008

________ The End of Poverty Economic Possibilities for Our Time New York Penguin2005

________ Investing in Development A Practical Plan to Achieve the MillenniumDevelopment Goals the Millennium Project London Earthscan Publishing2005

________ ldquoA New Global Consensus on Helping the Poorest of the Poorrdquo AnnualWorld Bank Conference on Development Economics 1999

Sahn David E ed Causes and Implications of Seasonal Variability in Household FoodSecurity Baltimore Johns Hopkins University Press 1987

Sarma J S Cereal Feed Use in the Third World Past Trends and Protections to 2000International Food Policy Research Institute Research Report No 57 Washing-ton DC December 1986

________ and Vasant P Gandhi Production and Consumption of Foodgrains inIndia Implications of Accelerated Economic Growth and Poverty AlleviationInternational Food Policy Research Institute Research Report No 81 Washing-ton DC 1990 pp 17ndash34

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Schady Norbert and Joseacute Rosero ldquoAre cash transfers made to women spent likeother sources of incomerdquo Economics Letters vol 101 (2008) pp 246ndash8

Schramm Gunter and Jeremy J Warford eds Environmental Management andEconomic Development Baltimore Johns Hopkins University Press 1989

Schultz Theodore W Transforming Traditional Agriculture Chicago University ofChicago Press 1964

Scobie Grant M and Rafael Posada T ldquoThe Impact of Technical Change on IncomeDistribution The Case of Rice in Colombiardquo American Journal of AgriculturalEconomics vol 60 no1 (February 1978) pp 85ndash92

Sen Amartya K Poverty and Famines An Essay on Entitlement and Deprivation NewYork Oxford University Press 1981

Sfeirounis Alfredo ldquoSoil Conservation in Developing Countriesrdquo Western AfricaProjects Department World Bank Washington DC 1986

Sharma Shalendra ldquoThe Truth About Foreign Aidrdquo Challenge (July-August 2005)pp 11ndash25

Siegel Paul B and Jeffrey Alwang An Asset Based Approach to Social RiskManagement SP Discussion Series 9926 Human Development Network SocialProtection Unit the World Bank Washington October 1999 67 pp

Skjonsberg Else Change in an African Village Kefa Speaks West Hartford ConnKumarian Press 1989

Smith Lisa C Usha Ramakrishnan Aida Ndiaye Lawrence Haddad and ReynaldoMartorell The Importance of Womenrsquos Status for Child Nutrition in DevelopingCountries International Food Policy Research Report number 131 WashingtonDC IFPRI 2003

Spriggs John ldquoBenefit-Cost Analysis of Surfaced Roads in the Eastern Rice Regionof Indiardquo American Journal of Agricultural Economics vol 59 (May 1977) pp375ndash9

Stevens Robert D ed Tradition and Dynamics in Small-Farm Agriculture Ames IowaState University Press 1977

Stiglitz Joseph ldquoOverseas Aid is Money Well Spentrdquo Financial Times April 142000 p 20

Streeten Paul What Price Food Agricultural Price Policies in Developing CountriesIthaca NY Cornell University Press 1987

Thirlwall AP Growth and Development New York Palgrave Macmillan 2006Thirtle Colin Lin Lin and Jenifer Piesse ldquoThe Impact of Research-Led Agricultural

Productivity Growth on Poverty Reduction in Africa Asia and Latin AmericardquoWorld Development 31 vol 12 (December 2003) pp 1959ndash75

Tietenberg T H ldquoThe Poverty Connection to Environmental Policyrdquo ChallengeSeptember-October 1990 pp 26ndash32

________ and H Folmer eds The International Yearbook of Environmental andResource Economics 20042005 Cheltenham UK Edward Elgar 2004

Timmer C Peter Getting Prices Right The Scope and Limits of Agricultural Price PolicyIthaca NY Cornell University Press 1986

________ Walter P Falcon and Scott R Pearson Food Policy Analysis BaltimoreJohns Hopkins University Press 1983

Todaro Michael P Economic Development New York Addison Wesley 2008Truman Harry S ldquoInaugural Address of the Presidentrdquo Department of State

Bulletin 33 Washington DC January 1949United Nations Centre for Social Development and Humanitarian Affairs

ldquoWomen Food Systems and Agriculturerdquo 1989 World Survey on the Role ofWomen in Development New York United Nations 1989

WORKS CITED

448

United Nations Department of Economic and Social Affairs Population DivisionWorld Population Prospects The 2006 Revision Highlights Working PaperNo ESAPWP202 2007

________ Development Program Human Development Report New York PalgraveMacmillan 2007

________ Development Programme Human Development Report 20072008 NewYork Palgrave Macmillan 2007

________ Human Development Report 2005 New York Hoechstetter 2005________ Human Development Report 2007ndash2008 (New York Palgrave Macmillan

Press 2007)________ Population Division World Population Prospects 2004 Revision Popula-

tion Database________ World Population Prospects the 2002 Revision New York United Nations

2003________ World Population Prospects The 2006 RevisionUN Standing Committee on Nutrition Fifth Report on the World Food Situation

Nutrition for Improved Development Outcomes New York United Nations 2004143 pp

U S Census Bureau 2005USDAERS 2008Varangis Panos Paul Siegel Daniele Giovannucci and Bryan Lewin ldquoDealing with

the Coffee Crisis in Central America Impacts and Strategiesrdquo The World BankDevelopment Research Group Policy Research Working Paper 299 March2003

von Braun Joachim Rising Food Prices What Should be Done IFPRI Policy BriefApril 2008

________ and Detlev Puetz Data Needs for Food Policy in Developing CountriesWashington DC International Food Policy Research Institute 1993

________ Detlev Puetz and Patrick Webb ldquoIrrigation Technology and Commercial-ization of Rice in The Gambia Effects on Income and Nutritionrdquo InternationalFood Policy Research Institute Research Report No 75 Washington DC1989

Von Pischke J D Dale W Adams and Gordon Donald Rural Financial Markets inDeveloping Countries Their Use and Abuse Baltimore Johns Hopkins UniversityPress 1983

Walsh John Preserving the Options Food Productivity and Sustainability ConsultativeGroup for International Agricultural Research Issues in Agriculture No 2Washington DC 1991

Wigley Tom M L ldquoThe Science of Climate Changerdquo Pew Center on ClimateChange Report 2005

Williamson Oliver The Economic Institutions of Capitalism New York Free Press1985

________ ldquoThe Economic Institutions of Capitalismrdquo Rand Journal of Econometricsvol 17 1986 p 280

Wilson E O ed Biodiversity Washington DC National Academy Press 1988Wolgin J M ldquoResource Allocation and Risk A Case Study of Smallholder Agricul-

ture in Kenyardquo American Journal of Agricultural Economics vol 54 (1975) pp622ndash30

World Bank Annual Review of Development Effectiveness 2000 supplement Table 13aAvailable online at wwwworldbankorg

________ Engendering Development New York Oxford University Press 2001

WORKS CITED

449

World Bank World Development Indicators 2008 2005 2000________ World Development Indicators on-line database________ World Development Indicators Online Database 2005________ World Development Report 2008 New York Oxford University Press________ World Development Report 1984________ World Development Report 1986 New York Oxford University Press 1986________ World Development Report 1980 New York Oxford University Press 1980________ and the International Fund for Agricultural Development Gender in

Agriculture Sourcebook Washington DC The World Bank 2009World Commission on Environment and Development Our Common Future New

York Oxford University Press 1987World Health Organization 2003________ Statistical Information System 2006________ World Health Report 2005 Make Every Mother and Child Count (Geneva

WHO Press 205) 252 ppWorld Vision International 2008 Annual Review Available online at wwwwviorgWortman Sterling and Ralph W Cummings Jr To Feed This World The Challenge

and the Strategy Baltimore Johns Hopkins University Press 1978Yaron Jacob ldquoWhat Makes Rural Financial Institutions Successfulrdquo World Bank

Research Observer vol 9 (1 1994) pp 49ndash70Zeller Manfred and Richard L Meyer The Critical Triangle of Microfinance from

Vision to Reality Baltimore Johns Hopkins University Press 2003

WORKS CITED

450

Subject Index

Aaccess to information 313adaptive research 242adjustable interest rates 382adjustment costs 358Afghanistan 166 395 396t 409Africa 4 5 6f 8 10 52 71 94 135b 149

150 152f 158 166 175 188 208ndash9239b 245 246 249t 252 261 262t263b 285 332 3422 343t 361 378382 383

Central 51tEastern 51t 399Horn of 284North 253tSouthern 51t 245 254 319 357 399Sub-Saharan see Sub-Saharan AfricaThe Sahel see Sahel TheWest Western 51t 135b 150 190

194b 277 352Africa Rice (WARDA) 249tAgricultural Trade Development and

Assistance Act of 1954 407agricultural

development 141ndash3 207ndash24 365ndash90integrated approach to 415ndash22role of trade 335ndash6theories of 207ndash12

export taxes 340ndash2extension see extensionlabor markets 275ndash8lobbies 331

prices of products and land 375production 39ndash40productivity 168ndash70 228ndash31

defined 5research see agricultural researchsystems 146ndash59technology 29ndash30trade 11 354

agricultural research 227ndash58categories of 241ndash3economic benefits 245ndash6environmental effects 238ndash9international research centers 246ndash9nutritional implications 237ndash8organization of 246ndash8rate of return on investment 232tspending 252ndash4 253ttransferability of results 250

agriculturechange in 417ndash20conservation 196bexport-oriented effects of 335foreign assistance to 400intensive use 21 209ndash10revolution first amp second 22brole of in development 18ndash22settled 22btraditional 131ndash43

agroforestry 249tAhmed Raisuddin 317AID see USAIDAIDS 10 77 356 424

see also HIV-AIDSallocative efficiency 100Amazon 175 179bAmerica see Latin North SouthAndes mountains 34 164anemia 41animal

inputs 285ndash6power compared with labor 157products 50 164

Page numbers followed byb mdash indicate material in boxesf mdash indicate material in figuresn mdash indicate material in footnotest mdash indicate material in tables

Note Proper nouns come before thesame word used generically ie

Human comes before human

agricultural continued

451

SUBJECT INDEX

annual cropping 154banti-feudal land reforms 265ndash7applied research defined 242Argentina 19 20t 251 332 339 372 385Asia 4 5 5f 71 94 138 142 166 168

188 190 192 195 198 208 209ndash10236b 246 247 253t 261 262t 263b286 319 342 343t 382 395 408 409423

Central 343tEast 319 383 388South 28b 94 148 158West 253t

Asian-Pacific countries 357asset redistribution 223assistance programs 393ndash406Atlantic Ocean 8Australia 20t 208 343t

Bbalance of payments 371banana(s) 57b 153 175 180 249t 264

333 337Bangladesh 20t 30 31b 38 71t 82f

143f 164 165f 292 294f 295 306t314t 315f 317 341 396t 408 409

Bangladesh Rural AdvancementCommittee (BRAC) 401

basic research 241ndash2bawon rice harvesting system 217bBedouin pastoral nomads 150Belarus 72tBelgium 400Benin 72tBennet MK 15 50Bennettrsquos law 50bilateral preferential agreements 352bio-diesel 60Biodiversity (IPGRI) 249tbiofuels 8 26 60ndash1 283biological technologies 22bbiotechnology research 243

benefits and costs 244ndash5products of 244

birth rates 75ndash6 77ndash9reduction of 79

Bolivia 132black market 305bloc-floating system 379Bolivia 396tBorlaug Norman 236b

Boserup Ester 154bBotswana 10 138 193b 332Brazil 20t 51t 60 71t 167 175 179b

188 228 229t 305 306t 313 339 341372 385 388 396t

Bread for the World 401Britain 103 114 209 328b 382 400Brimley Daniel W 175Brown Lynn R 185buffer stock program 307 359ndash60Buffett Warren 401Bulgaria 72t 268bbullock 141fBurkina Faso 72t 245Burundi 72tbush fallow cultivation 154b

Ccalorie

availability 5 32 33fintake 15

Cambodia see KampucheaCamp David Peace Agreement 408Canada 20t 343t 358 407 Canadian International Development

Agency(CIDA) 399capital

accumulation 101 104ndash5 116 274flight 381flows 388ndash9 393ndash8human 102 106ndash7-intensive goods 21ndash2-led growth 127markets 11 379ndash80physical 104ndash5physiological 107social 109sources of 116trade interactions 335

CARE 409bCaribbean 175 192 253t 358 361 383

385Caribbean Basin Initiative 352cassava 34 228 247 249t

mealybug 239bmosaic virus 228

casual labor 276ndash7Catholic Relief Services 401cattle 58f 133ndash4b 135b 138ndash41 152ndash3

175CDM = Clean Development Mechanism

452

SUBJECT INDEX

ceblokan harvesting system 217bCentral America 113 141 149 164 181

193 194b 209 264 277ndash8 319 337 358Centre for International

Forestry Research (CIFOR) 249tCentro de Mejoramiento de Maiz y

Trigo (CIMMYT) 424bCentro Internacional

de Agricultura Tropical(CIAT) 249tde la Papa (CIP) 249t 251f

cerealimport facility 361products 41 61 164

CGIAR = Consultative Group forInternational Agricultural Research

Chan-Kang Connie 317Chapagain Devendra P 175chemical

fertilizers 283pollution 170 284

Chenery Hollis 116child children

as investment 77ndash9 200ndash1benefits of 77 134bconsumption benefit 77education of 187ndash8 190f 200ndash1employment of 77ndash8 200ndash1malnutrition 77mortality 78

Chile 396tChina 10 30 71 71t 79 117 138 155

156b 164 166 192 228 229t 254 264267 270 284 306t 313 317 398b 423

CIAT = International Center forTropical Agriculture 239b 249t

CIDA = Canadian InternationalDevelopment Agency

CIFOR = Centre for InternationalForestry Research 249t

CIMMYT = International Center forMaize and Wheat Improvement 247249t 424b

CIP = Centro Internacional de la Papa(International Potato Center) 251f

Clark Colin 115Clean Development Mechanism 180ndash1climate change 12 140ndash1 148 152 168ndash9

adaptation to 168ndash9Cline William R 327cocoa 18 135b 153 180 277 333 337

338 340ndash1 344t 359 361

coffee 18 135b 153 175 180 192 255313 333 337 338 340 341 344t 359361

collectiveaction 219 350land tenure system 154ndash5 156b 264ndash5self reliance 357

Colombia 1f 20t 43f 58f 79 199f 235266 276b 306t 396t

commodityagreements 359ndash60groups 331ndash2marketing boards 316bmarkets 8price trends 360supply curve 230

common property management 180communicable diseases 10communications 313ndash5comparative advantage 113 329ndash31 380

principle of 329 330bCompensatory Financing

Facility (CFF) 361Schemes (CFS) 360ndash1

competitive advantage 380complements defined 53Congo Democratic Republic of

72t 74f 395Conservation Agriculture for Sus-

tainable Agriculture and RuralDevelopment (CA) 196b

labor effects 196bconstraints to trade 337ndash46

external demand 337ndash8Consultative Group for International

Agricultural Research(CGIAR) 247 248

consumer subsidy 304fconsumption parameters 56ndash9contraception 79cooperative farms 264copyrights 240 355Corn Laws 114 328bcorporate farms 264corruption 345 376ndash7 420ndash1cost differences 329cost of adjustment problems 351cost-recovery measures 189Costa Rica 387 396tCote drsquoIvoire 361 383cotton 133b 333 338 340 344t 358 361

453

SUBJECT INDEX

creditaccess to 197ndash8government-assisted programs 293ndash8markets 281ndash97policy lessons 296ndash7role of 288ndash9subsidized 293ndash5

crop rotation 22b 209cross-price elasticities 53cross-sectional data 54ndash5Cuba 266Cummings Ralph W 281current account deficit 382 383b

DDacca 31bdairy products sector 140 339death rates 75ndash6Deaton Angus 57bdebt

buying-back 387crisis 382ndash5

causes 382ndash3effects 383ndash5solutions 385ndash8

foreign 12 351forgiveness 400for conservation (nature) swap 387forgiveness partial 386relief 42ndash3 385ndash8rescheduling 386ndash8service 383

default probability 291 385deforestation 12 13 162 166ndash8 167f

179b 238results of 170

degradation of natural resourcessolutions to 176ndash82

demandcurve(s) 48 48f 52 63f 345effective 47ndash56

defined 47factors 8food 47ndash65

aggregate changes in 58ndash9determinants of 48ndash59 60t

influences on 58ndash9growth of 60t 407income

effect on 49elasticities of 49ndash52 91ndash2

-induced changes in 56ndash8interactions with supply 61ndash5law of 48price elasticity of 92shifts (food) 7 91-supply interactions 61ndash5

Democratic Republic of the Congo 72t74f 395 396t

demographic transition 76f 77dependency theory 119-20 127derivatives markets 361ndash2desertification 12 164ndash6 170 238

defined 165determinants of farming systems 146ndash9devaluation 372ndash3 384ndash5Development Assistance Committee of

OECD 397Development Round = Doha Round

353 356development 14ndash5 415ndash20

agricultural 207ndash24 393ndash406assistance programs 398ndash401banks regional 402diffusion theory 210ndash1location theory 210strategies 121-7

growth vs equity 124-5industry versus agriculture 122inward vs outward-led 123-4private vs public 125-6

sustainable 196bdefined 14

theory 87ndash128trade protectionism 119-20two-sector model 116-9value judgments 18

DFID = United Kingdom Departmentfor International Development

Dhaka Bangladesh 82fDiaz-Bonilla Eugenio 349dietary energy 32diminishing returns law of 97ndash8disease(s)

child 77communicable 10

diversification 137 210 345 358ndash9diversity biological 168division of labor 106 113Doha Round

trade negotiations 353 356

demand continued

454

elasticity continued

SUBJECT INDEX

Domar Evsey 116drainage 209 283drip irrigation 284drought 165

-resistant plants 284dryland farming 133b 164ndash5dual-economy models 116-9 117f 127

236Duckham Alec N 149ndash50

EEC = European Communityeconometric model 55economic

determinants ofcrop and livestock mix 155ndash8input use 155ndash8

development 14growth 89ndash111

sources of 100ndash9opportunities 81optimality 95 98ndash100 100fsolutions to natural resource

degradation 177ndash82transformation 19ndash21 20t 89ndash111

Ecuador 20t 53f 103f 163f 201f 233b266 285b 372 386

educationadult 188ndash9benefits of 186ndash8for non-farm jobs 187role of 186ndash9types of 188ndash9

effectsincome 53ndash4substitution 53

efficiencyallocative 100f 106improvement 106input 157fmarket 106output 159fprice 100f 106technical defined 106

Egypt 51t 166 305 306t 332 395396t 408 411

Eicher Carl K 24El Salvador 396telastic defined 52elasticity

complements 53

cross-price 53estimates 54ndash6income effect 49ndash53methods for obtaining estimates 54ndash6own-price 52price of demand 52ndash4substitution effect 53unit elastic defined 52ndash3

employmentoff-farm 137ndash8

energy 60deficiency 32t 166

enforcement of environmentalprotections 182

Engelrsquos law 49ndash50England see BritainEnhanced Heavily Indebted Poor Coun-

try (HIPC) debt relief initiative 386enlightened self interest 222ndash4environmental

degradation 12 161ndash82 238effects of research 238ndash9problems 170ndash93

erosion soil 12 162ndash4 238caused by livestock 141

ethanol 60 283Ethiopia 20t 35f 42 164 193 198 395

396t 408 409Euphrates River basin 1666Europe 71 75 114 209 319 331 343t

399Eastern 71 164 268b 270 399Northwest 14 22b

European Community (EC) 353 361407

exchangeflexible 389 391foreign defined 371rate devaluation 384rates 335 341ndash2 371ndash3 373b 388ndash9

expanding the extensive margin 208exports

cash-crop 18industrial 18-oriented agriculture 335quotas 338 341taxes 155 307 308f 341 421

extension 254ndash6extensive

livestock systems 153margin 208

455

SUBJECT INDEX

external debt 381ndash8externalities 126 171ndash2 173b

FFactor Endowment Theory of

Trade 335 336bfactors of production 95Falcon Walter P 3 365family

nuclear 190planning 78 79size 77ndash9structure 185ndash202well being 197

famine 5ndash6 30ndash6 31b 125 422Fan Shenggen 317FAO = Food and Agricultural

Organization of the United Nationsfarm

products markets for 407size 231ndash4surpluses disposal of 407tenure 231ndash4

Farmer Field Schools 196b 285bfarming systems 249t

biological factors 148determinants of 146ndash59endogenous factors 148exogenous factors 148human factors 147f 148ndash9institutional factors 147f 148ndash9physical factors 148technical factors 147f 148types of 149ndash55womenrsquos role 191ndash5

farmscommercial family 262ndash3family 262ndash3group 264state 264 268btraditional 129f 131ndash43size of 132ndash4types of 264ndash5

FDI = foreign direct investmentfeeding programs 40ndash1Fei John 116female see womenfertility change 75ndash80fertilizer 22 133b 139 174 282 283 424b

natural sources of 283-responsive rice 217b

feudalism 265FGT = Foster Greer Thorbecke IndexFGT Index 28bfinancial

services 290systems microfinance approach 295ndash6

financing gap 116fiscal policy 368Fisher Alan 115fish fisheries 249t 306tfixed-payment leases 216

-rent contracts 267flooding 164Food and Agricultural Organization

of the United Nations (FAO) 35 248403b

foodaid see food aidbalance sheets 35ndash6consumption 26demand see food demanddeprivation 8emergency 409for work programs 43fortification 40ndash1grains 6 407intervention programs 40ndash1livestock role in supply 138ndash9market structure 319ndash20prices 6ndash8 29ndash30 390safety regulations 353bstamps 309subsidy programs 40 305supply 3ndash6 25ndash6 138ndash9 237 423ndash4

food aid 43 397 400 407ndash11food demand 25ndash43 47ndash56 91 423ndash4

economics of 47ndash65effective 47ndash59determinants of 48ndash9income elasticities of 49ndash52law of 48 48f

foot-and-mouth disease 353bFord Foundation 247foreign aid 369

capital flows 395ndash8content of programs 400effects of 403ndash5effects on donors 406humanitarian 394rationale for 412results 404ndash5

456

SUBJECT INDEX

forestry rate of return on investment 232tformal money markets 289 291ndash3Foster J 28bFoster Greer Thorbecke Index 28bFrance 20t 254 352 400Frank Andre Gunder 119free trade areas defined 357free-rider problem 125-6fungicides 284 285bFuture Harvest centers 247ndash9futures markets ldquoexchangerdquo 361ndash2

GGates Bill and Melinda 401Gates Foundation 424GATT = General Agreement on Tariffs

and TradeGaud William S 236bGDP = Gross Domestic Productgender roles 185ndash202

determinants of 195ndash201in traditional farming 141ndash2

General Agreement on Tariffs and Trade(GATT) 352ndash4 355

genetic engineering 243Germany 71 72t 254 328bGhana 316 340ndash1gini coefficients 262global trade war 354globalization 11ndash12GNI = Gross National IncomeGNP = Gross National Productgoat (s) 139 152ndash3goiter 34goods inferior normal superior 52governance assistance 400government role in marketing 316ndash8

information 317ndash8infrastructure 317regulations 318

grains food crops 8 153 333 407Grameen Bank of Bangladesh 292 294f

295grants foreign assistance 397Great Britain see BritainGreat Depression 316bGreece 20tgreen

-house gas emissions 181manuring 209revolution 22b 108b 236b 247 424b

Greer J 28bGross

Domestic Product (GDP) 15 83b 332366ndash7 367f

National Income (GNI) 16f 90f 91fNational Product (GNP) 15 383 400

groundnuts 133b 137 249t 344tgrowth

constraints to 114contemporary theory 120ndash1determinant of 227ndash8stages in economies 114-5sources of 100ndash9 101b 117strategies 112ndash26technology driven 116theory 120ndash7

Guatemala 174 180 313 420fGuinea 72t

HHaiti 396t 367Hamilton Sarah 194bHarrod Roy 116Harrod-Domar model 116Harrod-Domar-Chenery model 116harvest 133b 134

-labor institutional systems 217bHayami Yujiro 207HDI = Human Development Indexhealth 8ndash10 37ndash8 284

reproductive 400Heckscher-Ohlin-Samuelson Theory 336bhedging 362Heifer International 401herbicides 284herding nomadic 164hides livestock role in providing 139Hima pastoral nomads 150Himalayas 164HIPC = Enhanced Heavily Indebted

Poor Country (debt relief initiative)history of food aid 407ndash8HIVAIDS 10 38 77 195 200 400 415homogeneity condition 55ndash6Honduras 11f 13 188 372 396t 398bhorticultural products demand

marketing 320 320bHossain Mahabub 317Household Responsibility System 267HPI = Human Poverty Index

457

SUBJECT INDEX

HumanDevelopment Index(HDI) 15 27Poverty Index (HPI) 17 27

human capital 102 106ndash7 185ndash202 380Hungary 72tHunger Project The 80Hunger Task Force 428hunger 4ndash6 8 25ndash43 418f 423hunter-gatherer societies 22bHurricane Mitch 13

IIARCs = International Agricultural

Research Centers 246ndash9 251 257IBRD = International Bank for Recon

struction and Development 402ICARDA = International Center for

Agricultural Research in DrylandAreas 294t

ICRISAT = International Crops ResearchInstitute for the Semi-Arid Tropics249t

IDA = International DevelopmentAssociation 402

IFAD = International Fund forAgricultural Development 292

IFC = International FinanceCorporation 402

IFPRI = International Food PolicyResearch Institute 41 249t 335

IITA = International Institute ofTropical Agriculture 239b

ILRA = International Livestock ResearchInstitute 249t

IMF = International Monetary Fund350 361 386 387b 389 402

immunization efforts 422import

restrictions 338 385substitution strategy123 332 335

incentives government-sponsored 181income 15

effect 53elasticity of demand 49ndash52 51t 60tfluctuations 27 39

from agriculture 90transfer programs 308 309

Index level of living 15India 13 19 30 38 51t 71 71t 79 117

139 164 188 201 228 229t 234 236b254 266 277 284 306t 314t 332 339340 396t 398b 423

Indian ocean 8indirect pricing policies 308Indonesia 13 20t 51t 71t 79 167 198

201 228 229t 314t 333 334t 337 372396t

inducedinnovation theory 212ndash6 282 419

implications 219ndash21 220ftechnical 212ndash4 213f

institutional change 214ndash6 419in Java 217b

industrial revolution 22b 328binelastic demand

curve 345defined 53

inequality defined 17binferior goods 52inflation 367ndash8 369 370binformation

access to 313government provision of 317ndash8lack of for marketing 312

infrastructurecommunications 313ndash5deficiencies 312government role 316ndash8storage 313

innovation 108bpossibilities curve 212 213f

input(s) 281ndash98animal 285ndash6high payoff 211importance of 281ndash9manufatured 282ndash7mechanical 286markets 281ndash97 287ndash8response curve 95ndash6 96f 97fsubsidies 287 345

insecticides 284instability food price 7institutional change 239ndash40 350 424ndash5insurance 27 137 289Integrated Pest Management 176 194b

285 285bIntellectual Property Rights 121 240ndash1

355intensification 210intensive

annual crops 151f 152ndash3livestock 151f 153

intercropping 137

458

SUBJECT INDEX

interest rates 373ndash4adjustable 382negative real rates 374rural rates 289ndash93

InternationalAgricultural Trade Development and

Assistance Act of 1954(PL 480) 407 408 409b

Agricultural Research Centers(IARC) 246-9 251 257

Bank for Reconstruction andDevelopment (IBRD) 402

Center for Agricultural Research inDryland Areas (ICARDA) 249t

Center for Insect Physiology andEcology 248

Center for Maize and WheatImprovement(CIMMYT) 247 249t

Center for Tropical Agriculture(CIAT) 239b 249t

Centre for the Settlement of Invest-ment Disputes 402

Committee of the Red Cross 401Crops Research Institute for the Semi-

Arid Tropics (ICRISAT) 249tDevelopment Association (IDA) 402Finance Corporation (IFC) 402Food Policy Research Institute

(IFPRI) 41 249t 335Fund for Agricultural Development

(IFAD) 292Institute for Tropical Agriculture

(IITA) 239b 249tLivestock Research Institute (ILRI)

249tMonetary Fund (IMF) 350 361 386

387b 389 402Rice Research Institute (IRRI) 205f

247 249tWater Management Institute (IWWI)

249tinternational

agricultural research centers 246ndash9248f 249t

institutions laws 222 224trade see trade

investment 104 395ndash8foreign direct (FDI) 395portfolio 395

IPGRI see BiodiversityIPM = Integrated Pest Management

IPR = Intellectual Property RightsIR-8 = rice variety 247 424bIraq 166 395 396t 409iron

deficiency 34deficiency anemia 32t

IRRI = International Rice ResearchInstitute

irrigation 21 166 176 209 238 249t283 369 424b

Islam -ic 192iso-cost line 158iso-revenue line 158isoquant (curve) 96 97f 155ndash8Israel 264 265f 395 396tItaly 20tIWWI = International Water Manage-

ment Institute

JJapan 20t 71t 214 254 270 331 343t

371Japan International Cooperation Agency

(JICA) 399Java 164 217bJICA = Japan International Cooperation

AgencyJohnston Bruce F 47Jordan 396tJorgenson Dale 116

KKampuchea (Cambodia) 30 396t 408Katmandu Nepal 13fKefa Village Zambia 133ndash4bKenya 51t 139f 150 177f 248 314tkibbutzim 264 265fknowledge

as a public good 121as a source of growth 177

Korea 164see North Korea South Korea

kwashiorkor 34Kyoto Protocol 180ndash1

Llabor

casual vs permanent 276ndash7compared to animal power 157demand for 81 116ndash9dual-economy model 116ndash9

459

SUBJECT INDEX

exchange 137-intensive consumer goods 22-land ratios (US Japan) 214

marginal cost of 118-surplus 116-9 117f

markets 260ndash78 374ndash5seasonality 276

Laguna de Tigre national park 174Lancaster House Agreements 272bland 260ndash78

access to 261 269ndash70banks 274commissions 268bmarkets 260ndash78ownership 149 261ndash5reform 198 260ndash7 267ndash75 278

defined 261results of 271ndash4 272b

rights 261supply fixed 92tenure 260ndash7

reform 265ndash7systems 21 154ndash5 261ndash5use patterns 175

Landsburg Steven 112 113latifundia 263Latin America 4 5 6f 52 138 150 175

188 192 198 201 208 236b 239b 246261 286 342 343t 357 378 381 382383 385ndash6 388ndash9 390 402 405 415423

ldquoLa Violenciardquo 276bLaw 4 (1973) Law 135 (1961) Law 200

(1936) 276blaw of

demand 48ndash9diminishing returns 97ndash8 113

LDC = less-developed countries 338380

leading sectors 115leases fixed payment 216Lesotho 195less-developed countries (LDC) 338

382 390level-of-living index 15Lewis W Arthur 116licenses export and import 345life expectancy 15List Frederick 114-5livestock 192 247 285 423

impacts on environment 140ndash1

management systems 22brevolution 140roles of 138ndash41systems changes in 140ndash1 152ndash3

lobbying 342 376ndash7location theory 210Lome Convention 361Loomis Robert S 146Lucas Robert 120Lutheran World Relief 401

Mmacroeconomy 366ndash8 367f

institutions 222 420ndash1policies 365ndash75 376ndash8prices 370ndash5relationships 378ndash90stabilization 402

Madagascar 168 367Maddison Angus 89maize 6 7f 51t 60 61 133b 137 164

247 249t 257 282 306t 307 314t344t 424b

rate of return on investment 232tmalaria 10 38 283 424Malawi 72t 191 277 314tMalaysia 51t 332 333 334tMali 20t 72t 340malnutrition 8 25ndash43 254

causes of 36ndash9health and 37ndash8measurement of 34ndash6

Malthus Thomas 113marasmus 34Marginal Rate of Technical

Substitution (MRTS) 157ndash8marginal

cost curve 230lands farming of 12output gain 97ndash8product 95 97ndash9 99f 118

Markandaya Kamala 25 184marker-assisted breeding 243 246market -ing

agencies boards 340-based interventions 361ndash2deficiencies failures 172 311ndash5distortions govenrment-induced 312functions 311ndash15 312fgovernment role in 316ndash8

labor continued livestock continued

460

SUBJECT INDEX

organizations 315supply defined 61systems 311ndash15transformation 319ndash20

marketing and planning committees(MPCs) Nepal 320b

Marx Karl 114-5Marxist perspective 119Masai pastoral nomads 150Masefield G B 149ndash50Mauritania 361 367MDC = more developed countries 338MDRI = Mulltilateral Debt Relief

Initiativemeasles 37ndash8meat 306t 333

demand 142provided by livestock 139 153

mechanical innovation 108bMellor John W 47 131mercantilism 113-4 328bmeta project function 214methane digesters 139Mexico 20t 51t 166 188 201 247 271

305 306t 319 332 356 382 385 386388 398b

City 83bMFIs = Micro-finance institutions 295microbial degradation research 243microcredit 292ndash3micro-finance 292ndash3 295ndash6 398b 401Middle East 22b 246 284 405MIGA = Multilateral Investment

Guarantee Assoociationmigration

causes of 81ndash2consequences of 82ndash4rural-to-urban 81ndash4 83bseasonal 134ndash5 135b

milkdemand 142provided by livestock 139 153

Mill John Stuart 113millet 51t 150 247minifundia 263minimum wage legislation 374ndash5mixed farming 151f 152ndash3Moldova 20t 398bmonetary

measures 27policy 368ndash70

money-markets rural 289ndash93supply 370b

Mongolia 150monoclonal antibodies research 243monopoly rights 335monopsonistic power 310Morocco 306tmortality

child 8 9finfant 8 15

MPCs = marketing and planningcommittees Nepal 320b

MRTS = Marginal Rate of TechnicalSubstitution

Mugabe Robert 272bMultilateral

Debt Relief Initiative (MDRI) 386Investment Guarantee Assoociation

(MIGA) 402multi-

cropping 154blateral lending agencies 386

multiple exchange rate system 341ndash2multiplier effects 288Myanmar 167

NNAFTA = North American Free Trade

AreaNational

Agricultural Research InstitutionEcuador 233b

Integration Program 179bnational savings 116

naturaldisaster 31bmonopolies 126

natural resource(s) 103ndash4degradation 15 170ndash6environmental influences on 103ndash4

Near East 6f 166negative externalities 126Nepal 13f 129 135b 139 164 167f 191f

192 320bNetherlands 400New International Economic Order

(NIEO) 353 354 357New Zealand 343tNGO = non-governmental organizationNicaragua 396t

market -ing continued

461

SUBJECT INDEX

NIEO = New International EconomicOrder

Niger 72tNigeria 51t 71t 167 228 229t 314t

316b 341 386 395 396t 397nitrogen fertilizers 283Nobel Peace Prize 236bnon-governmental organization (NGO)

400 401 412normal goods 52North

America 14 71 114 208Korea 30ndash1 42 409

North American Free Trade Area(NAFTA) 357ndash8

nutritionalassessment 35ndash6 37feducation 42implications of ag research 237ndash8

OODA = Official Development

Assistance 397ndash8 400 412OECD = Organization for Economic

Cooperation and Development 397OECD Development Assistance

Committee of 397Official Development Assistance

(ODA) 397ndash8 400 412oil 103 306t 344t 386OPEC = Organization of Petroleum

Exporting Countries 400Oportunidades (Mexico) 201opportunity cost 329optimality economic 95options markets 361oral rehydration therapy 42Organization for Economic

Cooperation and Development(OECD) 397 400

Organization of Petroleum ExportingCountries (OPEC) 400

organized money markets 289 291ndash3output levels 98ndash100overgrazing 12 152 170overvalued currency 341Oxfam 401

PPacific 142 253t 361Pakistan 71t 166 201 236b 284 306t

396t

Pan-American Agricultural School 188Papua New Guinea 198Paraguayan Chaco 264parastatal(s) 315

marketing agencies 340Pardey Philip G 69Paris Club 386 387b 388 421pastoral nomadism 150ndash2patents 121 241 355Payments for Environmental

Services (PES) 181PBRs = Plant Breedersrsquo RightsPeace Corps 425peanuts 153 358 361Pearson Scott R 3peas 153 249tpeasant associations 274perennial crops 153permanent labor 276ndash7Peru 87 257f 271 385 387 396tPES = Payments for Environmental

Servicespesticides 12 170 178f 194b 282284ndash5

health problems from 284pollution 238resistance to 170 284

philanthropy 401Philippines 20t 51t 178f 188 194b

205f 247 264 271 277 306t 314t 333334t 383 396t 397 398b

phosphate(s) 283PL (Public Law) 480 407ndash8 409bPlant Breedersrsquo Rights (PBRs) 240 241plant genetic material 249tPoland 72tpolitical

power shifts 303rents defined 376self-interest 394system effect on agriculture 155

pollutionchemical 170

population 69ndash86 400distribution of 70ndash2growth 10 69ndash76 100ndash1projections 80 80f

portfolio investment 395Portugal 71 72tPosada Rafael T 235positive externalities 126potash 283

462

potatoe(s) 53 132 201f 247 249t 285bpests of 285b

potatoes sweet 133b 137 249tpoverty 10 17b 25ndash43 78 385

alleviation of 39ndash43 127causes of 36ndash9chronic 27ndash9defined 17b 26 28index 28blending approach 295ndash6measurement of 17b 27 28bmonetary indices of 28b-related problems 4ndash5rural 29transitory 27ndash9traps 29

power provided by livestock 141PPF = Production Possibilities FrontierPrebish Raul 119pressure groups 376ndash7price

ceilings or floors 303ndash4 304fefficiency 100elasticity of demand 52ndash4 91ndash2intervention 302ndash9policy 57b 155

pricing policies 301ndash11effects of 309ndash11influences on 301ndash2

Production Possibilities Frontier(PPF) 158

productionchoices 95ndash100function defined 95function(s) 95ndash7 96f 97f 101b

productivity 91 118 185effect 230growth rate 252improvements 228ndash31input 229fmeasures of 136

program food aid 409ndash10PROGRESA program 201project food aid 410property rights 172 178 275protectionism 119ndash20 328bprotein

animal 423deficiency 32t

Public Law 480 407public

goods 125

marketing agencies 340sanitation 10

pulses 51t 153pumpkins 133bpurchased inputs 155

Qquota(s)

quantitative restrictions 351rights 345trade 338 341 359

Rrandom migration 150Ranis Gustav 116rationality 136ndash7rationing 305Raup Philip M 260Reardon Thomas 319 320recession 385 390recombinant DNA research 243redistribution of land 270ndash4regional

development banks 402disparities 234ndash5

relative price of food 6remittances 395ndash7 398bresearch agricultural 227ndash58

activities in Ecuador 233bbiological and soils 240categories of 241ndash3effects

distributional 231-ndash38nutritional 231ndash38

impacts 228ndash31mechancalchemical 240outputs 227public vs private 240results 227ndash8 237ndash8

resourcesustainability 161ndash83use 161ndash83

respiratory diseases 10results of aid 404ndash5Ricardo David 113-4 329rice 6 7f 41 51t 57b 61 87 142 150

153 208 210 234 247 249t 257 303306t 314t 317 423

African variety 228fertilizer-responsive varieties 217b

SUBJECT INDEX

public continued

463

harvesting systems 217brate of return 232tresearch program benefits 235semi-dwarf 236b

ripper tiller Tanzania 196brisk 12ndash3 136ndash7 226ndash7 291Robinson Sherman 349Rockefeller Foundation 247 401Romania 72t 268bRomer Paul 120roots and tubers 51t 150 153 249t 333Rosegrant Mark W 69Rostow Walt W 115rotational grazing 177frubber 333 344truminants 153run-off caused by livestock 141Runge C Ford 69rural

finance 289ndash97labor markets 278

rural-to-urban migration 81ndash4causes of 81ndash2consequences of 82ndash4

Russia 71t 72t 372 388Ruttan Vernon W 207rye 22b

SSachs Jeffrey 112 113 393safety nets 40Sahel The 51t 164 166 284 424salinity salinization 166 283sanitary -tation 10 41ndash2 355

and phyto-sanitary measures (SPS) 355savage growth stage 114savings (credit source) 289schistosomiasis 283school fees 189schooling years of 15Schramm Gunter 161Schultz Theodore W 136 211 227Scobie Grant M 235seasonality 134ndash5 276seed(s) as input 282ndash3 2287Senauer Benjamin 24 69Senegal 361Serbia 72tsettled agriculture 151f 152ndash3 195share lease tenure 216 264

sharecropping 265b 277sheep (ruminant) 139 153 249tshifting cultivation 150 151f 195short

fallow cultivation 154bleases 175

Schultz Theodore W 227siltation 162ndash4

caused by livestock 141Singapore 333 334tSinger Hans 119slash and burn cultivation 150Smartwood 180Smith Adam 106 113social

institutions 102justice 197ndash9safety nets 27 29science research 223

soildegradation 162ndash4erosion 12 150 162ndash4 167f

caused by livestock 141Solow Robert 116 120Solow model of development 120 127Somalia 8 396tsorghum 150 153 193b 249t 314t 344tSoros George 401South

Africa 278 319America 34 71 166 194b 208 319

358Asia 148 166Korea (Republic of) 20t 51t 266 270

332 333 334t 372 396t 399Vietnam 408

Soviet Union 164 264 270 408soybeans 60 61 333specialization 92 105ndash6Spriggs John 317SPS = sanitary and phyto-sanitary

measures 355Sri Lanka 13 40ndash1 79 198 306tStaatz John M 24STABEX 361stabilization 345ndash6stages of development 114-5State Bank of Bangladesh 292state farms 266bstructural adjustment 342 378strucuralist perspective 119ndash20 329

SUBJECT INDEX

rice continued

464

subject-matter specialists (extension)255

Sub-Saharan Africa 4 5 8 10 28b 3051t 71 142 148 169 195 229 253t286 313 316b 381ndash2 385 390 395415 423

subsidizedcredit effects of 294ndash5irrigation water 175

subsidy -ies 345 369fertilizer 287food 305price 304 339

subsistence family farms 262substitutes defined 53substitution effect 53Sudan 306t 361 396t 409sugar 41 57b 192 306t 331 333 338

358 359sugarcane 60 140 153 175 335superior goods 52supermarkets growth of 321supply

curve 61 62f 63finteractions with demand 61ndash5shifts (food) 7-side factor 92

surplus labor model 116-9sustainable development defined 14sustainability 161ndash82Swaziland 10 1138sweet potatoes 133b 137Syria 166

TTampV system 255

= training and visit systemTaiwan 138 248 266 270 396tTajikistan 398 399Tanzania 150 167 196b 198 314t 340

341 361tariff(s) e338 341 354 357 359taxes taxation

collection 368ndash9export 155 307 308f 341ndash5 343tindirect 341

tea 41 306t 333 341technological

innovation theory 120-1progress 105 417ndash20

telecommunications 313ndash5

tenancy tenant farmers 234 264ndash5 266btesting research 243 252Thailand 13 20t 51t 57b 141f 208 254

306t 371 388Thorbecke E 28bTigris River basin 166Timmer C Peter 3 301 319 320Togo 340total product curve 95trade 105ndash6 327ndash46

agreements 124 357ndash8barriers 255 349ndash511 354deficit 371developing country experience 332ndash6effects 335 336bexternal constraints to 351ndash8historical roots of 328bimpediments 227ndash46liberalization 356 358need for 327ndash8negotiations 352ndash5 356policy 331ndash2protectionism 119-20quotas 359restrictions 329ndash32 338ndash42 344ndash5terms of 119ndash20 358

trademarks 240trading blocs 353traditional agriculture farms 131ndash43

size of 132ndash4Tragedy of the Commons 152training and visit system (TampV) 255transaction costs 113-21 126 216ndash24

267 291ndash3 419defined 218

transferability of research 250transformation economic 89ndash95

causes of 90ndash2Transforming Traditional Agriculture 211transgenics

crops 245research 243

transparency in government 350tree crops 232t 333tropical pastures 249tTruman President Harry S 398ndash9Turkey 51t 164 166 201 372 396tTurner Ted 401Twain Mark 14two-gap model of development 116

SUBJECT INDEX

465

UUganda 20t 72t 150UK Department for International

Development (DFID) 399Ukraine 72tUNCTAD = United Nations Conference

on Trade and DevelopmentUNDP = United Nations Development

Programunemployment 116ndash9unit elastic defined 52United Kingdom see BritainUnited Nations 353

agencies for assistance 403bChildrenrsquos Fund (UNICEF) 403bConference on Trade and Devel-

opment (UNCTAD) 353 354 357Development Program (UNDP) 248

403bEducation Scientific and Cultural

Organization (UNESCO) 403bFund for Population Activities

(UNFPA) 403bMillenium Goals 400

United States (US) 20t 28b 60 71t 74f93f 94 103 214 254 328b 331 333 339 343t 352 353b 356 371 371379 380 389 394ndash5 408 425

Agency for International Develop-ment (USAID) 197 236b 285b 399

Congress 408Department of Agriculture

(USDA) 28bfarm products 385Federal Reserve 390

urbanization 10 80ndash4Uruguay 251Uruguay Round 353 354ndash5USAID = United States Agency for

International Development

Vvegetable -s 133b 142 153 313 333

335 338 346marketing in Nepal 320b

Venezuela 386Vietnam 337 396t 408village agent model 255Vitamin A 41

deficiency 32t 34von Braun Joachim 415

Wwage

employment 266bminimum 374ndash5rates 117ndash18 374ndash5

Wallerstein Immanuel 119WARDA see Africa RiceWarford Jeremy J 161water 283ndash4

management 211 283quality 10supplies 12

Wealth of Nations The 106weed control 285 424bweeding 133b 134WFP = World Food Programmewheat 6 7f 22b 51t 153 164 191f 211

232t 234 247 249t 251 257 305306t 314t 325 333 339 344t 359424b

WHO = World Health Organizationwireless communications 313ndash15women

education for 38invisibility of 192ndash5opportunities for 79

WorldAgroforestry 249tBank 28b 36 197 255 351 386 402Commission on Environment

and Development 14Fish Center 249tFood Programme (WFP) 403bHealth Organization (WHO) 10 32

38 403b 421Trade Organization (WTO) 339 350

352 353 355ndash7 388Vegetable Center 248Vision International 401

World War I 328bWorld War II 270 316b 352 378 398Wortman Sterling 281

XY

Yellow River basin China 164Yemen 72t

ZZambia 133ndash4b 167 3006tZamorano Honduras 188Zimbabwe 180 272b 277 278

SUBJECT INDEX

Economics of

Agricultural Development

Economics of Agricultural Development examines the causes severity and effects of per-sistent poverty rapid population growth and malnutrition in developing countriesIt discusses potential solutions to these problems and considers the implications ofglobalization for agriculture poverty and the environment

Areas covered in the book includebull The sustainability of the natural resource environmentbull Gender roles in relation to agriculture and resource usebull The contribution of agricultural technologiesbull The importance of agricultural and macroeconomic policies as related

to development and trade and the successes and failures of such policies

bull The implications for what might be done in the future to encourage morerapid agricultural and economic development

The globalization of goods services and capital for agriculture is fundamentalto the future of developing countries and has major implications for the fight againstpoverty and sustainability of the environment In recent years agriculture has onceagain returned to a position of centre stage as food price volatility has led countries tore-examine their development strategies

This new edition of the essential textbook in the field builds on the 2006 originaland reflects the following developments

bull The increased impact of climate changebull Issues affecting agricultural markets such as bio-fuels the rise in farm

prices and energy costsbull The move to higher valued agricultural products

This book will be essential reading for undergraduate students seeking to un-derstand the economics of agricultural development and the world food system in-cluding environmental and human consequences of agricultural development inter-national trade and capital flows

This book contains a wealth of real world case studies and is now accompaniedby a website that includes powerpoint lectures a photo bank and a large set of dis-

cussion and exam questions

George W Norton is Professor of Agricultural and Applied Economics atVirginia Polytechnic Institute and State University Blacksburg Virginia USA

Jeffrey Alwang is Professor of Agricultural and Applied Economics atVirginia Polytechnic Institute and State University Blacksburg Virginia USA

William A Masters is Professor of Agricultural Economics at PurdueUniversity West Lafayette Indiana USA

Economics of

Agricultural

DevelopmentWORLD FOOD SYSTEMS and

RESOURCE USE

SECOND EDITION

GEORGE W NORTON

JEFFREY ALWANG

Virginia Polytechnic Institute

and State University

WILLIAM A MASTERS

Purdue University

First edition published 2006Second edition 2010by Routledge2 Park Square Milton Park Abingdon Oxon OX14 4RN

Simultaneously published in the USA and Canadaby Routledge270 Madison Avenue New York NY 10016

Routledge is an imprint of the Taylor amp Francis Group an informa business

copy 2006 2010 George W Norton Jeffrey Alwang and William A Masters

All rights reserved No part of this book may be reprinted or reproduced or utilisedin any form or by any electronic mechanical or other means now known orhereafter invented including photocopying and recording or in any informationstorage or retrieval system without permission in writing from the publishers

British Library Cataloguing in Publication DataA catalogue record for this book is available from the British Library

Library of Congress Cataloging in Publication DataNorton George WEconomics of agricultural development by George W Norton Jeffrey Alwangand William A Masters mdash 2nd edp cmIncludes bibliographical references and index1 AgriculturemdashEconomic aspects I Alwang Jeffrey R II Masters William A IIITitleHD1415N67 20103381mdashdc222009043168

ISBN10 0-415-49264-5(hbk)ISBN10 0-415-49424-9(pbk)ISBN10 0-203-85275-3(ebk)

ISBN13 978-0-415-49264-5(hbk)ISBN13 978-0-415-49424-3(pbk)ISBN13 978-0-203-85275-0(ebk)

This edition published in the Taylor amp Francis e-Library 2010

To purchase your own copy of this or any of Taylor amp Francis or Routledgersquoscollection of thousands of eBooks please go to wwweBookstoretandfcouk

ISBN 0-203-85275-3 Master e-book ISBN

v

ContentsPreface vii

Part 1 Dimensions of World Food and Development Problems 1

1 mdash Introduction 32 mdash Poverty Hunger and Malnutrition 253 mdash Economics of Food Demand 474 mdash Population 69

Part 2 Development Theories and the Role of Agriculture 87

5 mdash Economic Transformation and Growth 896 mdash Development Theory and Growth Strategies 112

Part 3 Agricultural Systems and Resource Use 129

7 mdash Agriculture in Traditional Societies 1318 mdash Agricultural Systems and Their Determinants 1469 mdash Resource Use and Sustainability 16110 mdash Human Resources Family Structure and Gender Roles 185

Part 4 Getting Agriculture Moving 205

11 mdash Theories and Strategies for Agricultural Development 20712 mdash Research Extension and Education 22713 mdash Land and Labor Markets 26014 mdash Input and Credit Markets 28115 mdash Pricing Policies and Marketing Systems 301

Part 5 Agricultural Development in an Interdependent World 325

16 mdash Agriculture and International Trade 32717 mdash Trade Policies Negotiations and Agreements 34918 mdash Macroeconomic Policies and Agricultural Development 36519 mdash Capital Flows Foreign Assistance and Food Aid 39320 mdash Lessons and Perspectives 415

Glossary of Selected Terms 429Authors Cited 435Works Cited 439Subject Index 450

vi

vii

Preface

Persistent poverty rapid population growth and malnutrition in de-veloping countries are among the most serious issues facing the worldtoday Economics of Agricultural Development examines the causes se-verity and effects of these problems It identifies potential solutionsand considers the implications of globalization for agriculture povertyand the environment It identifies linkages in the world food systemand stresses how agricultural and economic situations in poor coun-tries affect industrialized nations and vice versa It focuses on the rolethat agriculture can play in improving economic and nutritional well-being and how that role might be enhanced It explores causes and im-plications of agricultural commodity price volatility

Much has been learned about the roles of technology educationinternational trade and capital flows agricultural and macroeconomicpolicies and rural infrastructure in stimulating agricultural and eco-nomic development In some cases the same factors can contribute toeconomic growth and lead to price and income instability or environ-mental risk These lessons and other issues are examined in the bookusing basic tools of economic analysis The need is stressed for improvedinformation flows to help guide institutional change in light of socialcultural and political disruptions that occur in the development pro-cess

The challenge in studying the economics of agricultural develop-ment is to build a broad view of the problem and to bring economictheory to bear on specific challenges faced by the rural sector and onmeans for utilizing agricultural surpluses to further overall economicdevelopment The goal of this book is to help students and other inter-ested practitioners gain an understanding of the agricultural develop-ment problem including the environmental and human consequencesof different development paths and the influence of international tradeand capital flows It is designed to help students develop skills that willenhance their capability to analyze world food and development prob-lems

viii

This book interprets for undergraduates the economics of devel-opment and trade including the importance of extending economictheory to account for institutions imperfect information and the will-ingness of people to exploit others and to act collectively This exten-sion provides important insights for development policy and helps ex-plain why some countries develop while others are left behind Therole of the government in promoting broad-based development is ex-plored The book also covers topics related to sustainability of the envi-ronment gender roles in relation to agriculture and resource use andthe importance of macroeconomic policies as related to developmentand trade

This new edition of the book addresses the causes and implica-tions of recent sharp commodity price increases It contains added dis-cussion of economic issues related to biofuels and climate change andhow they affect agriculture in developing countries

INTENDED AUDIENCEEconomics of Agricultural Development is designed as a comprehensivetext for the first course on the economics of world food issues and agri-cultural development The book is aimed at undergraduate studentswith the only prerequisite a course in introductory economics Studentsin undergraduate courses that address world food and agricultural de-velopment represent a wide variety of majors Economic jargon is keptto a minimum and explained where necessary and the book sequen-tially builds a base of economic concepts that are used in later chaptersto analyze specific development problems A second audience for thebook is those who work for public and private international develop-ment organizations

ORGANIZATION of the BOOKAgricultural development is important for rural welfare and for over-all economic development Part One of the book considers the manydimensions of the world food ndash income ndash population problem in both ahuman and an economic context After the severity and dimensions ofthe problem have been established Part Two examines the economictransformation experienced by countries as they develop sources ofeconomic growth and theories of economic development includingthe role of agriculture in those theories Part Three provides studentswith an overview of traditional agriculture agricultural systems andtheir determinants in developing countries with particular attention toissues such as environmental sustainability and gender roles Part Fourthen identifies agricultural development theories and the technical and

PREFACE

ix

institutional elements required for improving the agricultural sector Itstresses the need to build on and modify current agricultural develop-ment theories Finally Part Five considers the importance of the inter-national environment including trade and trade policies macroeco-nomic policies capital flows and foreign assistance including food aidThe concluding chapter integrates various development componentsaddressed in the book and discusses future prospects for agriculturaldevelopment

ACKNOWLEDGMENTSThis edition of the book has benefited from the contributions of numer-ous individuals including feedback from students in classes at VirginiaTech and Purdue We thank Laura McCann and Laurian Unnevehr forreviewing an earlier draft as well as proposed revisions The encour-agement and assistance of our colleagues at Virginia Tech and Purdueare gratefully acknowledged We especially thank Brad Mills DavidOrden Dan Taylor SK DeDatta Anya McGuirk Herb Stoevener JerryShively Sally Thompson and Wally Tyner The book has benefitedgreatly from discussions and interactions on development issues overmany years with Phil Pardey Stan Wood Paul B Siegel Terry Roe BillEaster Dan Sisler Brady Deaton Mesfin Bezuneh and numerous gradu-ate students

We thank Robert Langham and other editors at Routledge Pressfor their assistance and we especially want to thank Mary Holliman ofPocahontas Press in Blacksburg Virginia for her invaluable editorialand production assistance We also thank Daren McGarry SteveAultman Jessica Bayer Jacob Ricker-Gilbert and Adam Sparger withassistance on figures and illustrations

George NortonJeffrey Alwang

Will Masters

PREFACE

PART 1

Dimensions of World Food

and Development Problems

Rural family in Colombia

2


3

CHAPTER 1

IntroductionMost hunger is caused by a failure to gain access to the locallyavailable food or to the means to produce food directly


This Chapter1 Examines the basic dimensions of the world food situation2 Discusses the meaning of economic development3 Considers changes that occur during agricultural and economic

development

OVERVIEW of the WORLD FOOD PROBLEMOne of the most urgent needs in the world today is to reduce the perva-sive problems of hunger and poverty in developing countries Despitemany efforts and some successes millions of people remain ill-fedpoorly housed under-employed and afflicted by a variety of illnessesThese people regularly suffer the pain of watching loved ones die pre-maturely often from preventable causes In many countries the natu-ral resource base is also being degraded with potentially serious impli-cations for the livelihoods of future generations

Why do these problems persist how severe are they and what aretheir causes What does the globalization of goods services and capi-tal mean for agriculture poverty and environment around the worldAnd how does the situation in poor countries feed back on industrial-ized nations and vice versa An understanding of the fundamentalcauses of the many problems in poorer countries is essential if solu-tions are to be recognized and implemented What role does agricul-ture play and how might it be enhanced What can rich countries do tohelp How do the policies in developed countries affect developing

1 C Peter Timmer Walter P Falcon and Scott R Pearson Food Policy Analysis (Balti-more Johns Hopkins University Press 1983) p 7

4


countries These are some of the questions addressed in this book Glo-balization will continue and a key issue is how to manage it to thebetterment of developing and developed countries alike

Much has been learned over the past several years about the rolesof technology education international trade and capital flows agri-cultural and macroeconomic policies and rural infrastructure in stimu-lating agricultural and economic development In some cases these samefactors can be a two-edged sword they contribute to economic growthon the one hand but lead to price and income instability or environ-mental risk on the other These lessons and other potential solutions todevelopment problems are examined herein from an economic perspec-tive The need is stressed for improved information flows to help guideinstitutional change in light of social cultural and political disruptionsthat occur in the development process

World Food and Income SituationAre people hungry because the world does not produce enough foodNo In the aggregate the world produces a surplus of food If the worldrsquosfood supply were evenly divided among the worldrsquos population eachperson would receive substantially more than the minimum amount ofnutrients required for survival The world is not on the brink of starva-tion Population has roughly doubled over the past 40 years and foodproduction has grown even faster

If total food supplies are plentiful why do people die every dayfrom hunger-related causes At its most basic level hunger is a povertyproblem Only the poor go hungry They go hungry because they can-not afford food or cannot produce enough of it themselves The verypoorest groups tend to include families of the unemployed or under-employed landless laborers the elderly handicapped and orphans andpersons experiencing temporary misfortune due to weather agricul-tural pests or political upheaval Thus hunger is for some people achronic problem and for others a periodic or temporary problem Manyof the poorest live in rural areas

Hunger is an individual problem related to the distribution of foodand income within countries and a national and international problemrelated to the geographic distribution of food income and populationRoughly one-fifth of the worldrsquos population (about one billion people)lives on less than $1 per day (about one-half lives on less than $2 perday) These people are found primarily in Asia and Africa The largestnumber of poor and hungry live in Asia although severe hunger andpoverty are found in Sub-Saharan Africa and in parts of Latin AmericaGood strides have been made in reducing global poverty over the

5

Many farm workers in Asia earn between one and two dollarsper workday


past 30 years the proportion of the worldrsquos population living on lessthan $1 per day has been cut by more than half and is now less than 20percent However more remains to be done to alleviate poverty-relatedproblems

While hunger and poverty are found in every region of the worldSub-Saharan Africa is the only major region where per-capita food pro-duction has failed to at least trend upward for the past 30 years AsFigure 1-1 shows per capita food production in Africa has stagnatedsince 1980 and had experienced a downward trend for several yearsbefore that time Latin America and particularly Asia have experiencedrelatively steady increases The result has been significant progress inreducing hunger and poverty in the latter two regions while per-capitacalorie availability remains below minimum nutritional standards inmany Sub-Saharan countries Low agricultural productivity (farm out-put divided by farm inputs) wide variations in yields due to naturaleconomic and political causes and rapid population growth have com-bined to create a precarious food situation in these countries

Annual variation in food production is a serious problem particu-larly in Sub-Saharan Africa (see Figure 1-1) This variation has causedperiodic famines in individual countries particularly when productionproblems have been compounded by political upheaval or wars that

6

Figure 1-1 Index of per capita food production(Source FAOSTAT data 2005)


have hindered international relief efforts Production variability causeswide price swings that reduce food security for millions who are on themargin of being able to purchase food If the world is to eliminatehunger it must distinguish among solutions needed for short-termfamine relief those needed to reduce commodity price instability (orits effects) and those needed to reduce long-term or chronic povertyproblems

Food PricesFor many years for most people in the world the real price of food fellrelative to the prices of other things The international prices (in nomi-nal or ldquocurrentrdquo dollars) of maize rice and wheat mdash the worldrsquos majorfood grains mdash are shown in Figure 1-2 Despite peaks in 1974 19811996 and 2008 the average prices of all three grains have fluctuatedwithout strong trends for several years The prices of most other thingshave risen much more steadily with inflation so for most people therelative (or ldquoconstantrdquo) price of food has slightly fallen with exceptionsduring the peak years This reduction in the real price of food is bothgood and bad because prices affect economic growth and social wel-fare in a contradictory fashion Lower food prices benefit consumersand stimulate industrial growth but can lower agricultural producer

7


incomes and reduce employment of landless workers To the extentthat lower prices reflect lower production costs impacts on producersmay be mitigated Future food-price trends will depend on the relativeimportance of demand shifts resulting primarily from changes in popu-lation income and non-food uses for farm products (such as bio-fuels)compared to supply shifts resulting from a variety of forces particu-larly new technologies and climate changes

Instability in local and world food prices however is a seriousproblem affecting food security and hunger in developing countriesThe three grains shown in Figure 1-2 have exhibited sizable year-to-year price variations This instability was most severe during the 1970sand most recently Food price fluctuations directly affect the well beingof the poor who spend a high proportion of their income on food Gov-ernments are finding that food price instability increases human suf-fering and also threatens political stability

As shown in Figure 1-2 grain prices were higher than normalin 2007ndash2008 The higher prices were due to a combination of factorsthat shifted supply and demand as well as actions by market specula-tors Supply factors included such items as adverse weather conditions

Figure 1-2 World prices of major grains in current dollars (Source FAOSTAT2009 for years through 2006 and IMF International Financial Statistics 2009 foryears 2007ndash09)

8


and higher fuel and fertilizer costs while demand factors included itemssuch as increased demand for grains for bio-fuel use continued popu-lation and income growth in many developing countries changes incurrency values and policy changes in countries that increased theirdemand for imported food Also speculative investments in commod-ity markets increased driving up commodity prices more than basicsupply and demand factors alone would have dictated As the globaleconomy turned down in 2008 speculators eventually reduced theseinvestments fuel prices dropped and income growth slowed Grainsupplies also increased and food prices retreated substantially fromtheir highs of early 2008

MalnutritionHunger is most visible to people in developed countries when a droughtor other disaster results in images in the news of children with bloatedbellies and bony limbs enduring the pain of extreme hunger Disturb-ing as such images are in a sense they mislead The less conspicuousbut more pernicious problem in terms of people suffering and dyingis chronic malnutrition While accurate figures of the number of mal-nourished in the world are not available and even good estimates de-pend on the definition used a conservative estimate is that roughly 860million people suffer from chronic or severe malnutrition associatedwith food deprivation More than ten million people many of themyoung children die each year from causes related to inadequate foodconsumption Increasing per-capita food production has allowed moreof the worldrsquos population to eat better But for those in the lower in-come groups the situation remains difficult

HealthPeople born in developing countries live on average 14 years less (inSub-Saharan Africa 27 years less) than those born in developed coun-tries Health problems often associated with poverty are responsiblefor most of the differences in life expectancies Mortality rates for chil-dren under age five are particularly high often 10ndash20 times higher thanin developed countries (see Figure 1-3) Though countries with highrates of infant mortality are found in all regions Sub-Saharan Africancountries are particularly afflicted The band of high infant mortalitystretching from the Atlantic coast across Africa to Somalia on the In-dian Ocean covers some of the poorest and most undernourished popu-lations in the world

9

Fiig

ure

1-3

U

nd

er-

five

mo

rta

lity r

ate

s (

pe

r 1

00

0 li

ve

bir

ths)

(S

ou

rce

Wo

rld

He

alth

Org

an

iza

tio

n S

tatistica

l In

form

atio

n S

yste

m

20

06

)


10

Poverty affects health by limiting peoplersquos ability to purchase foodhousing medical services and even soap and water Inadequate publicsanitation and high prevalence of communicable diseases are also closelylinked with poverty A major health problem particularly among chil-dren is diarrhea usually caused by poor water quality According tothe World Bank 5 to 10 million children die each year from causes re-lated to diarrhea Respiratory diseases account for an additional 4 to 5million deaths and malaria another million Basic health services arealmost totally lacking in many areas on average ten times as manypeople per doctor and per nurse are found in low-income countries asin developed countries

A major health problem that continues to grow rapidly in the de-veloping world is acquired auto-immune deficiency syndrome (AIDS)The disease is particularly difficult to contain in many African coun-tries because of the ease of its heterosexual spread lack of educationabout the disease limited use of protective birth-control devices andin some cases absence of government commitment to address the prob-lem Estimates are that roughly a quarter of the adult populations incertain countries such as Botswana and Swaziland are HIV positiveEffects are felt in lost productivity and increased poverty in additionto its effects on direct human suffering As serious as the problem cur-rently is in Africa the region likely to be devastated most by AIDS inthe future is Asia According to the World Health Organization an es-timated 33 million people worldwide were living with HIVAIDS in2007

Population GrowthHow important is population growth to the food-poverty-populationproblem It is very important and will continue to be so at least for thenext 40ndash50 years Population is growing less than 1 percent per year indeveloped economies but 2 percent per year in developing countriesexcluding China and 3 percent or more in many Sub-Saharan African countries These higher growth rates place pressureon available food supplies and on the environment in many low-in-come countries Population growth and food production are closelylinked and changing either in a major way takes time as discussed inChapter 4 It is clear that continual increases in food production areneeded because regardless of how successful are efforts to control popu-lation growth world population will not stabilize for many years Rapidurbanization is also occurring as populations continue to grow


11


Children in Honduras

GlobalizationFood and economic systems in less-developed countries are affectedby the international economic environment far more today than theywere in years past Trade and other economic policies abroad and athome international capital flows migration and oil price shocks havecombined to increase the instability of and opportunities for improv-ing the food and economic security of developing countries

International trade in agricultural products (as with other prod-ucts) has grown rapidly since the 1970s building on improvements intransportation and information systems As exports and imports of farmproducts constitute a higher proportion of agricultural production andconsumption effects of domestic agricultural policies aimed at influ-encing the agricultural sector are altered World prices become moreimportant to farmers than they were previously and possibilities formaintaining a nationrsquos food security at the aggregate level are improvedalthough price volatility remains an issue Production and policychanges abroad also tend to have a great effect on domestic agricultureas international trade grows While the need for national food produc-tion self-sufficiency has been reduced the need to be price competitivewith other countries has grown as has the need to participate in inter-national negotiations to alter the policy environment

International capital (money) markets through which currenciesflow from country to country in response to differences in interest ratesand other factors have become as important as trade to the food and

12


economic systems in less-developed countries The volume of interna-tional financial transactions far exceeds the international flows of goodsand services Capital flows affect the values of national currencies inforeign exchange markets The foreign exchange rate or the value ofone countryrsquos currency in terms of another countryrsquos currency is animportant determinant of the price a nation receives for exports or paysfor imports Speculation in financial markets has led to rapid inflowsand outflows of capital in some countries resulting sharp changes inasset values and incomes

Many less-developed countries also have serious foreign debt prob-lems Many countries have reduced their rate of government spendingin efforts to service this debt and this decrease in turn has lowered theavailability of pubic services creating further hardships for the poorThe need for foreign exchange to repay external debts has also increasedthe importance of exports for less-developed countries forcing somecountries to reexamine their trade and exchange-rate policies At thesame time new technologies have been changing the possibilities thatcountries have for producing and trading particular products

Environmental DegradationAs populations grow environmental problems become more severeDeforestation farming of marginal lands overgrazing and misuse ofpesticides have contributed to soil erosion desertification poisoningof water supplies and climate change The global climate has becomegradually warmer and less stable while water has become scarcer En-vironmental problems exist in every region of the world Some degra-dation is intentional but most is the unintended result of people andgovernments seeking means of solving immediate food and economiccrises often at the cost of long-term damage to the environment Someof this damage may compromise the ability of a country to raise in-comes in the long run When people are hungry it is hard to tell themto save their resources for the future and environmental conservationrepresents a form of savings However many potential solutions existthat are consistent with both short-term increases in food productionand long-term goals of simultaneously sustaining or improving envi-ronmental quality while raising incomes

Risk and UncertaintyMost of the factors mentioned above are associated with increased ex-posure to risk and uncertainty Fluctuating prices exchange rate in-stability certain crop pests and rapidly changing weather patterns

13


Slum close to riverbank in Katmandu Nepal

represent risk factors Recent research has shown that risks and riskmanagement imply real costs that may compromise long-run improve-ments in well being Risk also lowers welfare in the short run For ex-ample Hurricane Mitch struck the Central American coastal regionduring October 1998 causing massive losses in productive capacity andwashing out roads houses and entire villages In Honduras alone itkilled more than 8000 people and injured more than 12000 Deforesta-tion in hillside areas contributed to the hurricanersquos damage as land-slides and flooding washed out low-lying areas In December 2004 alarge earthquake off the coast of Indonesia caused a tsunami that washedashore in several countries especially in Indonesia Sri Lanka Indiaand Thailand killing more than 228000 people

Risk is not necessarily bad Innovation and entrepreneurship arerisky It is the way that risks are managed that most influences eco-nomic growth Risk management needs to be conducted in an efficientmanner the proper balance must be found between managing risksand pursuing other goals

The preceding overview provides brief highlights of some of thedimensions of the food-income-population problem These and otherproblems are discussed in more depth in subsequent chapters and al-ternative solutions are suggested First however it is important to con-sider what we mean when we talk about development

14


MEANING of DEVELOPMENTThe term development means a change over time typically involvinggrowth or expansion Economic development involves changes inpeoplersquos standard of living For most of human history there was littlesuch change but over the past 300 years there has been a rapid and (sofar) sustained increase in almost every kind of human activity Growthoccurred first and has been sustained the longest in Northwest Europeand North America but similar kinds of expansion have occurred allaround the world

Development is a process with many economic and social dimen-sions For most observers successful economic development requiresas a minimum rising per-capita incomes eradication of absolute pov-erty and reduction in inequality over the long term The process is adynamic one including not only changes in the structure and level ofeconomic activity but also increased opportunities for individual choiceand for improved self-esteem

Development is often a painful process Adjusting to new circum-stances is always difficult as Mark Twain famously wrote ldquoIrsquom all forprogress mdash itrsquos change I canrsquot standrdquo There is often dramatic socialupheaval with traditional ways of life being displaced existing socialnorms being challenged and increasing pressures for institutional andpolitical reform The physical and cultural landscape of a country canchange radically during economic development And at the individuallevel the standard of living for the poorest people in a society doessometimes decline even as average real incomes increase More oftenthe fruits of improvement are unequally distributed By any measurepoverty and deprivation remain widespread despite the astonishingimprovements in living standards experienced by many all across theglobe

As economic activity continues to expand there is continuous con-cern with the constraints imposed by natural resources and environ-mental factors The World Commission on Environment and Develop-ment has defined sustainable development as ldquodevelopment that meetsthe needs of the present without compromising the ability of futuregenerations to meet their own needsrdquo2 Thus the term ldquodevelopmentrdquoencompasses not only an economic growth component but distri-butional components both for the current population and for futuregenerations

2 World Commission on Environment and Development Our Common Future (NewYork Oxford University Press 1987) p 43

15


Measures of DevelopmentAlthough development is difficult to measure it is often necessary todo so in order to assess the impacts of particular programs to establishcriteria for foreign assistance and for other purposes Because of itsseveral dimensions single indicators of development can be mislead-ing Measures are needed that are consistent with the objective of rais-ing the standard of living broadly across the population Average per-capita income is frequently used as a measure (see Figure 1-4) Is it agood measure

Average per capita income is not a perfect measure of living stan-dards for several reasons but finding an alternative indicator that canincorporate each dimension of development is impossible Because de-velopment is multidimensional collapsing it into a single index mea-sure requires placing weights on different dimensions Average per-capita income is an inadequate measure even of the economic dimen-sions because it misses the important distributional elements of devel-opment and is a crude measure of peoplersquos well-being

Alternative multidimensional development indicators have beensuggested One of the oldest is a level-of-living index proposed by MKBennett that weights 19 indicators for which data were available in 19513

Examples of indicators include caloric intake per capita infant mortal-ity rates number of physicians per 1000 of total population and yearsof schooling A more recent index is the Human Development Index4

(HDI) which weights life expectancy education and income Weight-ing schemes are subjective however and average per-capita income ishighly correlated with many of the indicators Consequently averageper-capita income measured as gross national product (GNP) or grossdomestic product (GDP) per capita is often employed as a first approxi-mation then measures such as income distribution literacy rates lifeexpectancy and child mortality are examined separately or as part ofan index Even these supplementary indicators can be misleading dueto regional disparities within countries

Some studies have called for the GNP income measure itself to bemodified to account for depreciation or appreciation of natural resource-based assets particularly forests This modification may be possibleonce natural resource accounting procedures are further refined

3 See M K Bennett ldquoInternational Disposition in Consumption Levelsrdquo American Eco-nomic Review vol 41 September 1951 pp 632ndash49

4 United Nations Development Program Human Development Report (New YorkPalgrave Macmillan 2007) p 356

16


Fig

ure

1-4

G

NI p

er

ca

pita

2

00

4 (

Atla

s M

eth

od

)(S

ou

rce

Wo

rld

Ba

nk

Wo

rld

De

ve

lop

me

nt

Ind

ica

tors

On

line

Da

tab

ase

)

17


Incomes and DevelopmentPoverty and low incomes are most frequently associated with under-development while growing per-capita incomes should indicate increas-ing levels of development As discussed above increasing average in-comes may not necessarily mean more development because the dis-tribution of this income often determines whether poverty and inequal-ity are diminished as the mean grows Some of the relationships betweenpoverty and inequality are discussed in Box 1-1

Numerous measures of inequality and the extent of poverty existFor example the Human Poverty Index (HPI) measures the extent ofdeprivation with respect to life expectancy education and income5 Ifas is argued above the meaning of development contains some ele-ment of poverty reduction or increased equality of income distribu-tion then clearly the incomes of the poor and destitute should be raisedduring the development process

Policies undertaken to promote development have diverse effectson the incomes of the poor Some people benefit but often some do not

5 United Nations Development Program Human Development Report (New YorkPalgrave Macmillan Press 2007) p 357

BOX 1-1

POVERTY and INEQUALITYPoverty is generally defined as the failure to achieve certain minimum stan-dards of living By its very nature poverty refers not just to averages but todistributions Poverty is not however synonymous with inequality coun-tries with perfect equality could contain all rich or all poor people Measure-ment of poverty requires three steps determining an appropriate measureor indicator deciding on its minimum level and counting the number orpercentage of people falling below it Alternatively a measure of degree orintensity of poverty would indicate the amount by which people fall belowthe poverty line

While poverty refers to some level or position with respect to a mea-sure such as income inequality refers to the distribution of that measureamong a population For example evidence from 21 developing countriesindicates that on average 6 percent of household income is received bythe poorest 20 percent of the households whereas 48 percent of house-hold income is received by the richest 20 percent In some countries theextremes are even more dramatic It is possible for poverty to decrease ina country during the development process but for inequality to increase atleast for a period of time

18


and at times incomes fall for certain population groups It is impor-tant to consider the winners and losers in the development processIncome distributions and changes in them are indicators of the impactof development policies on different groups in society

Values and DevelopmentValue judgments or premises about what is or is not desirable are inex-tricably related to development economics Concerns for economic andsocial equality poverty eradication and the need to improve healthand education all derive from subjective beliefs about what is good andwhat is not Solutions to specific problems often involve tradeoffsand decisions about public resource allocations always involvetradeoffs Governments make such tradeoffs every day as most gov-ernment actions are costly to some people even as they benefit othersEconomics can be a powerful tool for evaluating these tradeoffs pro-viding insights into the costs and benefits of different actions winnersand losers and longer-run consequences of savings investment andconsumption decisions Economics is however less well-suited formaking value decisions

Even if people share the same set of beliefs and values they mayattach different weights to the individual beliefs and values within thatset Because there is no correct set of weights people may not agreeabout appropriate solutions to development problems even if the sug-gested solutions appear conceptually sound in terms of leading to theirintended impacts

Most policy suggestions would result in both gainers and los-ers In some cases the gainers could compensate the losers but some-times they could not and often they do not Because affected groupshave differing political strengths within society economic and so-cial development policies cannot be separated from the political pro-cess These realities must be considered if development policies areto succeed

ROLE of AGRICULTUREMany alternative development paths or strategies exist The strategyfollowed by an individual country at a particular point in time is or atleast should be influenced in part by its resource endowments and stageof development Some countries with vast oil and mineral resourceshave generated capital for development by exporting those resourcesOthers have emphasized cash-crop exports such as coffee cocoa andtea Some have focused on industrial exports while others have stressedincreases in basic food production The optimal development path will

19


vary from country to country but the choice of an inappropriate pathgiven the existing resource endowments and stage of development canresult in long-term stagnation of the economy

Numerous examples can be found of countries choosing the wrongdevelopment path and paying the price Argentina a country well-en-dowed with land resources pursued government policies in the 1940sand 1950s that stressed industrialization and virtually ignored agricul-ture The result was that agricultural exports previously an importantcomponent of economic growth stagnated in the 1950s and foreignexchange shortages prevented the imports of capital goods needed forindustrialization Economic growth slowed dramatically as a result In-dia is another country whose potential for agriculture-driven growthwas subverted by a disproportionate emphasis on industrialization inthe 1950s and 1960s

Agriculture is not very productive in most low-income countriesEarly in the development process much of the population is employedin agriculture and a high percentage of the national income is derivedfrom that sector6 (see Table 1-1) As development proceeds populationgrows and per-capita income increases As incomes grow more food isdemanded either agricultural production or imports must increaseBecause agriculture commands so many of the resources in most low-income countries few funds are available for importing food or any-thing else unless agricultural output grows

The capacity of the agricultural sector to employ an expandinglabor force is limited As incomes continue to rise the demand for non-food commodities grows as well Therefore economic development re-quires a structural transformation of the economy involving relativeexpansion of nonagricultural sectors The agricultural sector must con-tribute food labor and capital to that expansion It also provides amarket for nonagricultural goods

This economic transformation is illustrated in Table 1-1 Agricul-ture accounts for a large percentage of total income and an even largerpercentage of total employment for the lower-income countries Thecontribution of agriculture to national incomes declines from 30 to 50percent for the lower-income countries to 15 to 20 percent for the

6A warning about measurement is appropriate in most countries it is difficult to mea-sure the number of people employed in agriculture Multiple job holdings sea-sonal labor use in agriculture and unpaid household labor all complicate the mea-surement problem Often data on the number employed in agriculture are obtainedby (generally high-quality) census estimates of the rural population Even in ruralareas many people are employed outside agriculture

20


Table 1-1 Relationship among Per-Capita National Income the

Proportion of National Income in Agriculture and the Proportion

of the Labor Force in Agriculture Selected Countries 2006

Country Per capita Agriculture GDP Percentage of income as a percentage active labor force(in PPP dollars)1 of total GDP in agriculture

Male Female

Ethiopia 581 47 84 76Uganda 848 32 60 77Mali 1004 37 50 30Bangladesh 1068 20 50 59Moldova 2190 18 41 40

Philippines 2956 14 45 25Indonesia 3209 13 43 41Colombia 5867 12 32 8Ecuador 6737 7 11 4Thailand 7061 11 44 41

Brazil 8474 5 25 16Argentina 10815 8 2 1Mexico 11387 4 21 5South Korea 21273 3 7 9Italy 27750 2 5 3

Greece 29261 3 12 14

Japan 30290 2 4 5France 30591 2 5 2Australia 34160 3 5 3Canada 34972 2 4 2United States 41812 2 2 1

Source World Bank World Development Indicators 20081 PPP stands for purchasing power parity and means that the incomes are con-

verted to dollars taking into account cost-of-living differences between thecountries

middle-income range and down to 5 percent or below for the highestincome countries

The initial size and low productivity of agriculture in most de-veloping countries suggests an opportunity for raising national in-come through agricultural development Because of the initial sizeof and low per-capita income in the agricultural sector there is realscope for improving the distribution of income and enhancing thewelfare of a major segment of the population through agriculturaldevelopment

21

CHAPTER 1 mdash INTRODUCTION

One of the keys to agricultural development is to improve infor-mation flows In primitive societies economic activities are local andinformation is basically available to all Inappropriate activities are con-strained by social and cultural norms As development begins to pro-ceed and economies become more complex information needs increasebut traditional forms of information transmission are incapable of meet-ing these needs Modern information systems are slow to develop cre-ating inequalities in access to new information Those with greater ac-cess than others can take advantage of this situation to further theirown welfare often at the expense of overall agricultural and economicdevelopment

Some changes required to foster broad-based and sustainable de-velopment require institutional changes and capital investments Capi-tal investments necessitate savings Such savings are channeled intoprivate and public investment the latter to build the infrastructureneeded for development Saving requires striking a balance betweenpresent and future levels of living because it requires abstention fromcurrent consumption Means must be sought to reduce this potentialshort-run versus long-run conflict during the development processHowever certain types of investments necessary for development suchas education provide both short- and long-run benefits as do invest-ments in technologies and employment-intensive industries

Improving AgricultureHow can agriculture be improved to facilitate its role in providing foodand contributing to overall development There are still areas of theworld particularly in parts of Latin America and Africa where landsuited for agricultural production is not being farmed Most increasesin agricultural production will have to come however from more in-tensive use of land currently being farmed Such intensive use will re-quire improved technologies generated through research as well asimproved irrigation systems roads market infrastructure and otherinvestments It will require education and incentives created throughchanges in institutions such as land tenure systems input and creditpolicies and pricing policies (see Box 1-2)

Agriculture and Employment InteractionsAgricultural development can provide food labor and capital to sup-port increased employment in industry and can stimulate demand inrural areas for employment-intensive consumer goods Because of theircomparative advantage in labor-intensive production many develop-ing countries will need to import capital-intensive goods such as steel

22


BOX 1-2

HISTORICAL PERSPECTIVE on AGRICULTURAL

DEVELOPMENTThe historical progression of agricultural development can be broadly bro-ken into four distinct periods marked by three ldquorevolutionsrdquo in productiontechnology and social institutions

First from the time that we first appeared on earth human beingshunted and gathered their food Hunter-gatherer societies typically lived insmall groups experienced little population growth

Then more than 10000 years ago a combination of climate changesand other factors created conditions for the development of settled agricul-ture In the Middle East and elsewhere people began to collect and culti-vate the seeds of plants that eventually became modern barley wheatand rye This development is known as the first agricultural revolution andpermitted a slow but significant increase in human population density

More recently a few hundred years ago rising population density andopportunities for trade led to a second agricultural revolution In North-western Europe and elsewhere farmers developed crop rotations and live-stock management systems that permitted rapid growth in output per per-son fueling the industrial revolution and the eventual mechanization ofmany important tasks

Finally in the late nineteenth and early twentieth centuries scientificbreeding chemical fertilizer and other innovations allowed rapid increasesin output per unit of area The spread of these biological technologies todeveloping countries known as the green revolution has been a powerfulengine of economic growth and poverty alleviation allowing low-incomepeople to produce more food at lower cost than ever before

These historical trends played out at different speeds and in differentways across the globe A few people in the poorest countries still devotesubstantial energy to hunter-gatherer activities and many millions of farm-ers still cultivate the same seeds in the same ways as their ancestorsBecause of population growth these techniques and institutional arrange-ments yield less and less output over time The development and spreadof higher-productivity systems to suit these peoplersquos needs is among themajor humanitarian challenges of our time

and fertilizer and export labor-intensive consumer goods and certaintypes of agricultural goods Countries that do not match an employ-ment-oriented industrial policy with their agricultural developmentpolicy will fail to realize the potential income and employment benefitsof agricultural development

23


SUMMARYSome of the basic dimensions of the world food-poverty-populationproblem were examined The aggregate world food situation was re-viewed and questions such as who the hungry are and why they arehungry even though the world produces a surplus of food were ad-dressed The significance of population growth and a series of forces inthe global economy that influence developing countries were stressed

The meaning and measures of development were discussed andimportance of development problems The desirability of suggestedsolutions depends on value judgments While alternative developmentstrategies can be followed agriculture has an important role to play inoverall development in most developing countries Development willrequire a complex set of improved technologies education and insti-tutions and an employment-oriented industrial policy

IMPORTANT TERMS and CONCEPTSAgricultural productivity InstitutionsDevelopment International capital marketsEnhanced information flows International tradeEnvironmental degradation Measures of developmentFood-poverty-population problem Population growthFood price instability Structural transformationForeign exchange rates of the economyGlobalization SustainabilityHealth problems Technology

Looking AheadIn order to visualize more clearly the relationships among food sup-plies food demand population growth and nutrition it is importantto examine facts scientific opinion and economic theory We make thisexamination in the remaining chapters of Part One in this book Weturn first in Chapter 2 to the causes and potential solutions to hungerand malnutrition problems

QUESTIONS for DISCUSSION1 Are people hungry because the world does not produce enough

food2 Has food production in developing countries kept pace with

population growth there3 Is malnutrition more widespread today than in the past4 Why did food prices rise so dramatically in 2008

24


5 What are some factors that will influence the price of food over thenext 10 to 20 years

6 Is there any hope of bringing more land into production to helpincrease food production

7 Why is agricultural development particularly important in less-developed countries

8 Approximately what proportion of the worldrsquos population lives onper-capita incomes of less than $2 per day

9 What is development To what extent are values important whendiscussing development issues

10 Is average per-capita income a good measure of level of living11 Why is most of the labor force engaged in agriculture in many

less-developed countries12 Does economic development require expansion of the nonagricul-

tural sector in low-income countries13 What is the conflict between increasing near- versus long-term

levels of living in developing countries14 What are the major health problems in developing countries and

what are their primary causes15 How fast is population growing in developing countries16 Why has international agricultural trade become more important

over the past 30 years17 Why have international capital markets become more important

to developing countries over the past 30 years18 Why might low food prices be both good and bad19 Why has environmental degradation become an increasing prob-

lem in developing countries

RECOMMENDED READINGSEicher Carl K and John M Staatz International Agricultural Development

(Baltimore Johns Hopkins University Press 1998) especially pp 3ndash53Food and Agriculture Organization of the United Nations State of Food

and Agriculture 2008 (Rome FAO 2008) (and various other years)Runge C Ford Benjamin Senauer Philip G Pardey and Mark W

Rosegrant Ending Hunger in Our Lifetime Food Security and Globaliza-tion (Baltimore Johns Hopkins University Press 2003)

Todaro Michael P Economic Development (New York Addison Wesley2008) especially Chapters 1 2 and 3

United Nations Development Programme Human Development Report20072008 (New York Palgrave Macmillan 2007)

World Bank World Development Report 2008 (New York Oxford UniversityPress) see earlier volumes as well

25

For hunger is a curious thing at first it is with you all the time wak-ing and sleeping and in your dreams and your belly cries out insis-tently and there is a gnawing and a pain as if your very vitals werebeing devoured and you must stop it at any cost and you buy amomentrsquos respite even while you know and fear the sequel Thenthe pain is no longer sharp but dull and this too is with you alwaysso that you think of food many times a day and each time a terriblesickness assails you and because you know this you try to avoidthe thought but you cannot it is with you Then that too is gone allpain all desire only a great emptiness is left like the sky like a wellin drought and it is now that the strength drains from your limbsand you try to rise and find that you cannot or to swallow water andyour throat is powerless and both the swallow and the effort of re-taining the liquid taxes you to the uttermost

mdash Kamala Markandaya1

This Chapter1 Describes the world food situation2 Examines different forms of poverty hunger and malnutrition

their magnitudes and consequences and how they are measured3 Identifies principal causes of and potential solutions to problems

with poverty hunger and malnutrition in developing countries

THE WORLD FOOD SITUATION

World Food Demand and SupplyWorld food consumption and production have each grown about 22percent per annum since 1970 while in developing countries consump-tion has grown about 37 percent and production 35 percent Cereals

CHAPTER 2

Poverty Hunger and

Malnutrition

1 Kamala Markandaya Nectar in a Sieve (New York New American Library 1954) p 91

26

are the most important sources of food and since the mid-1960s worldcereal production has risen by roughly one billion tons per year It islikely that an additional billion tons in production per year will beneeded by 2030 to meet food needs of a world population expanding innumbers and in income It is also likely that cereal imports by develop-ing countries will increase from about 10 percent of consumption toabout 15 percent

While the overall numbers and projections suggest gradual im-provement in reducing malnutrition in the world there are still severalcountries in which per-capita food consumption has declined and isnot likely to increase enough to significantly reduce the number of un-dernourished Even in countries with growing average food consump-tion some groups may not see their consumption levels increase house-hold food consumption is closely related to household incomes andthe most disadvantaged are afflicted by low and uncertain levels ofincome In addition the rate of growth in agricultural output for theworld as a whole has slowed since the 1980s and the use of cereals andsugar to produce bio-fuel products has created competition for theseproducts for food When food supplies are short prices rise creatingsevere problems for those who spend a high proportion of their limitedincome on food The effects of the food price increase in 2007ndash2008 area good example as they are estimated to have caused an increase in thenumber of people malnourished in the world from 800 million to 860million A best-case scenario for the world over the next 30 years wouldseem to point to a reduction in severely malnourished to about 400ndash500million people but for populations in many countries the struggle forfood will continue Therefore we turn now to how poverty and accessto food manifest themselves in terms of hunger malnutrition and insome cases famine

POVERTYPoverty has many faces and is one of the major challenges facing thedevelopment community Poverty is widely understood to be an in-ability to meet basic needs and the poor tend to be hungry are withoutadequate shelter and have limited access to health care The poor lackopportunity and their powerlessness often lead to hopelessness anddespair To most people reading this book poverty is an invisible andabstract problem somewhere out there We seldom think about it andwhen we do we often donrsquot know what to think or how to take actionagainst it Trends since the early 1980s point to a decrease in globalpoverty but stark challenges remain in 2005 an estimated 14 billion


27

people mdash about one fourth of the worldrsquos population mdash lived inextreme poverty and efforts to reduce poverty must be constantlyrefined

Measuring PovertySince poverty is multidimensional efforts to measure it can be compli-cated by attention to its different dimensions Two broad types of mea-surement schemes exist monetary and non-monetary Monetary mea-sures consolidate the different dimensions into a single unit of measuremdash money Their strengths include the ability to make comparisons in acommon unit a non-arbitrary measurement scheme and ability to quan-tify the extent depth and severity of poverty (see box 2-1) Howevermonetary approaches often fail to capture dimensions of poverty thatmay be especially important and intractable such as social exclusionand political powerlessness

Non-monetary measures include qualitative assessments and in-dices that combine different dimensions such as the Human Develop-ment Index (HDI) and Human Poverty Index (HPI) described in Chap-ter 1 These indices often face the criticism that the weights used arearbitrary and measures vary significantly when the weights are changed

The different approaches complement each other and their com-bination has allowed a deeper understanding of poverty For exampleparticipatory poverty assessments that engage in discussions withgroups of poor people about their conditions and the unique challengesthey face often accompany monetary assessments and the combina-tion can help in understanding how policies can be formulated to re-duce poverty

Vulnerability Transitory and Chronic PovertyPoverty is not a constant state for many developing-country householdsWeather pests diseases and policies cause fluctuations in income thattranslate into movement in and out of poverty mdash households are vul-nerable to becoming poor This in-and-out-of poverty situation is im-portant because separate policies may be needed to address transitorycompared to chronic poverty Evidence shows that transitory povertymdash households who move in and out of poverty over time mdash accountsfor a substantial portion of overall poverty As a result means of pro-tecting people from transitory income shortfalls may substantially im-prove the global poverty picture Formal and informal insuranceschemes social safety nets and other means of reducing or managingrisks can help achieve this aim Rural public work programs mdash such as


28

BOX 2-1

MONETARY MEASUREMENT of POVERTY1

Three primary challenges in measuring poverty are (i) deciding what tomeasure (ii) identifying a value below which a household is deemed to bepoor and (iii) adding it up for the population Poverty involves an inability tocontrol sufficient resources to meet a minimum level of well being andanalysts use household income or consumption expenditure to measure itConsumption is generally preferred because income particularly in ruralareas is seasonal and variable while consumption is smoother and ofteneasier to measure The poverty line is the value of income or expenditureson a daily monthly or annual basis below which a person is deemed to bepoor This poverty line can be determined many ways In the United Statesthe poverty line was created in 1963 using the minimum cost of achievingan adequate diet based on US Department of Agriculture food plans Non-food expenditures were accounted for by observing that poor householdsgenerally spend about a third of their total budget on food the food povertyline was multiplied by 3 to obtain the total poverty line This line has beenupdated over time by adjusting for changes in the cost of living A com-monly used international poverty line is the World Bankrsquos use of $1 perperson per day (in 1993 prices) to reflect extreme poverty (this numberwas recently revised to be $125 in 2005 prices) and $2 per day (2005prices) to reflect moderate poverty

With a household survey incomes or expenditures can be comparedto the poverty line households with values below the line are poor Policymakers are interested not only in which households are poor but also inwhere the poor are located what they do and how poverty has changedover time Monetary indices of poverty are used to address these con-cerns and the most commonly used poverty index called the Foster GreerThorbecke (FGT) Index2 is one that reflects the prevalence (proportion ofthe total population that is poor) depth (the degree of shortfall below thepoverty line) and severity of poverty (the degree of inequality among thepoor) This index gives policy makers a nuanced view of the total povertypicture for example a policy may increase the depth of poverty amongsome while reducing the total proportion of the population that is poorAccording to the most recent estimates 40 percent of the population inSouth Asia was poor in 2005 compared to 51 percent in Sub-Saharan Af-rica In contrast the poverty severity measures were 3 percent for SouthAsia compared to over 10 percent for Sub-Saharan Africa indicating a farmore serious problem in poverty severity in Sub-Saharan Africa than inSouth Asia

1 For more information see Martin Ravallion ldquoPoverty comparisons A guide toconcepts and methodsrdquo Living Standards Measurement Study Working Paperno 88 (Washington DC World Bank 1992)

2 J Foster J Greer and E Thorbecke A Class of Decomposable Poverty Mea-sures Econometrica Volume 52 (1984) pp 761ndash66


29

dam-building irrigation and water supply schemes road constructionand maintenance programs mdash are examples of social safety nets thatmay reduce vulnerability to poverty and build infrastructure for agri-cultural development

Chronic poverty is often caused by very different factors house-holds do not have access to enough human physical natural and otherassets to earn sufficient incomes for minimum levels of well-being Pov-erty traps caused by insufficient assets severely degraded natural re-sources and other factors are difficult to escape and often require long-term investments in asset building access to new factors of productionand improved institutions

Agricultural Development and the PoorOne of the most common misconceptions about poverty is that it islargely an urban problem Pictures of teeming slums with inadequatesanitation and rotting infrastructure help bolster this perception Incontrast rural residents are thought to live in relatively spacious con-ditions and to be able to rely on own-production of foods in times ofdire need In fact on a global level the rural poor make up more thanthree-fourths of the total poor and rural poverty is twice as prevalentas urban poverty2 Rural poverty is a major problem and as we will seethroughout this book agricultural development can play a major rolein its reduction but agricultural development can also alleviate urbanpoverty

Agricultural technology has direct impacts on the rural poor byincreasing incomes of farmers many of whom may be poor Care mustbe taken during development and subsequent release of new technolo-gies to ensure that they are accessible to poor producers but evidenceshows that in many cases poor producers benefit directly Indirect ben-efits to the poor from growth in agriculture come from two primarysources increased demand for labor and increased supply of food caus-ing food prices to drop The latter benefit can be substantial and is animportant reason why global poverty fell from the early 1980s untilrecently Food price declines have led to higher levels of living even for

2 The prevalence of global rural poverty was estimated in 2005 to be 297 percent com-pared to a 132 percent poverty rate in urban areas of developing countries Whilerural poverty has declined relative to urban poverty due to urbanization 754 per-cent of the developing worldrsquos poor are found in rural areas Source MartinRavallion Shaohua Chen and Prem Sangraula 2007 ldquoNew Evidence on the Ur-banization of Global Povertyrdquo Policy Research Working Paper forthcoming WorldBank


30

people who do not depend directly on agriculture When global foodmarkets tighten as they did recently poverty rises due to the indirecteffect of higher food prices

HUNGER MALNUTRITION and FAMINEHunger is a silent crisis in the world In times of famine it can tear atthe heartstrings as media attention focuses on its dramatic effects Infact the most extreme type of hunger is severe calorie and protein un-dernutrition during a famine However more pervasive is chronic un-der-nutrition and malnutrition associated with poverty illness igno-rance maldistribution of food within the family and seasonal fluctua-tions in access to food We begin our discussion of hunger with thecontrast between famines and chronic malnutrition

FaminesFamine is marked by an acute decline in access to food that occurs in adefinable area and has a finite duration This lack of access to food usu-ally results from crop failures often in successive years due to droughtflood insect infestation or war During a famine food may actually bepresent in the affected area but its price is so high that only the wealthycan afford it Food distribution systems may break down so that foodcannot reach those who need it

Famines have occurred throughout history In recent years theirprevalence has been greatest in Sub-Saharan Africa but famines alsohave occurred in North Korea periodically since 1995 in Kampuchea(formerly Cambodia) in 1979 Bangladesh in 1974 India in 1966 to 1967and China in 1959 to 1961 The latter was the worst famine of the 20thcentury and resulted in an estimated mortality of at least 16 millionpeople

Famine is the extreme on the hunger scale because it causes ex-treme loss of life and concurrent social and economic chaos over a rela-tively short period of time As access to food falls people begin by bor-rowing money and then selling their assets to acquire money to pur-chase foods Subsistence farmers sell their seed stocks livestock plowsand even land Landless laborers and other poor groups lose their jobsor face steeply higher prices for food at constant wages As the famineintensifies whole families and villages migrate in search of relief Thetelltale signs of acute malnutrition and eventually sickness and deathappear (see Box 2-2)

Fortunately progress is being made against famine Although largevariations occur in annual food production in individual countriesand world population continues to grow the frequency and intensity


31

BOX 2-2

NATURAL DISASTER and FAMINE in BANGLADESH1

From June to September 1974 severe flooding in the Brahmaputra Riverin Bangladesh led to large-scale losses of the dry-season rice crop andcreated pessimism about the prospects for the transplanted spring cropThe price of rice doubled in fewer than three months during and after thefloods Two months after this sudden upturn in rice prices unclaimed deadbodies began to be collected in increasing numbers from the streets ofDacca the capital city Similar collections were reported throughout thecountryside The government of Bangladesh officially declared a famine inSeptember 1974 Estimates of the final death toll vary widely but mostagree that more than 1 million people died of starvation or related causesduring and after the famine

Insufficient food stocks clearly hindered the governmentrsquos efforts toprovide relief Inadequate relief stocks should not however be confusedas a cause of the famine the evidence clearly shows that in 1974 ad-equate food grains were available in Bangladesh to avoid famine Thissame evidence shows that the districts most affected by the famine evenhad increased availability of food per person compared to prior years

What then caused the famine Landless laborers and farmers withless than half an acre of land were most severely affected by the famineThese groups whose only true asset was their labor power found that thevalue of their labor declined greatly relative to the price of rice Despiteavailable food in local markets they were unable to purchase it The flooddid not immediately affect food supply since the lost crop would not havebeen harvested until the next year anyway It did however greatly loweremployment opportunities Lower wages combined with higher rice priceswere the root causes of the 1974 Bangladesh famine

1 Most of this material is drawn from Amartya K Sen Poverty and Famines An

Essay on Entitlement and Deprivation (New York Oxford University Press 1981)

of famines has decreased due to improved information and transporta-tion networks increased food production and reserves and dedicatedrelief organizations Much of the starvation we see during famines nowoccurs in areas where transportation systems are deficient and wherepolitical conflict thwarts relief efforts The recent North Korean faminewas due to a combination of natural disasters economic collapse andlack of political will to alleviate the problem

Chronic Hunger and MalnutritionAs devastating as famines are they account for only a small fraction ofhunger-related deaths Famines can be attacked in a relatively shortperiod of time if political conflict in the affected country does not


32

hamper relief efforts Chronic hunger and malnutrition affect a muchgreater number of people and are more difficult to combat

Although no accurate figures on the prevalence of malnutritionexist the World Health Organization (WHO) estimates that a half-bil-lion people suffer from protein and calorie deficiencies and perhaps anequal number suffer from malnutrition caused by inadequate intakesof micronutrients principally iron vitamin A and iodine Thus roughly15ndash20 percent of the worldrsquos population suffers from some form ofmalnutrition Malnutrition does not affect all segments of the popula-tion equally Preschool children and pregnant and nursing women areparticularly vulnerable to its dangers

Serious malnutrition in developing countries reflects primarilyunder-nourishment mdash a shortage of food mdash not an imbalance betweencalories and protein The availability of calories per capita by countryis illustrated in Figure 2-1 Many of the countries with very low per-capita calorie availability are found in sub-Saharan Africa A close butnot perfect correspondence exists between low calorie availability andthe low-income countries identified in the previous chapter The majornutritional problem was once believed to be the shortage of proteinAlthough dietary protein is important many nutritionists now believethat when commonly consumed cereal-based diets meet energy (calo-rie) requirements it is likely that most protein needs will also be satis-fied for most people older than about two years of age Thus for ev-eryone except infants the greatest concern is the total quantity of foodavailable to eat and this quantity can most readily be measured bytotal dietary energy in terms of calories per day In settings where over-all energy intake meets minimum needs any remaining protein or mi-cronutrient deficiencies can often be improved with rather small invest-ments to improve the quality of the diet


Table 2-1 Estimated Number of People Affected by Preventable

Malnutrition Worldwide

Morbidity Estimated Group due to Prevalence most

Deficiency Malnutrition of Morbidity affected

Protein and energy Underweight 150000000 ChildrenProtein and energy Stunted growth 182000000 ChildrenIron Anemia 2000000000 Every age and sexVitamin A Blindness 250000 - 500000 Every age and sexIodine Brain damage 50000000 Every age and sex

Source World Health Organization 2003

33


Fig

ure

2-1

D

aily

ca

lori

e a

va

ilab

ility

pe

r ca

pita

2

00

3 (S

ou

rce

F

AO

STA

T d

ata

)

34

Nevertheless areas can be found with adequate calorie intake butdeficient protein or micronutrient intake Regions where diets are basedon staples such as cassava or sugar rather than cereals are more likelyto be deficient in protein even if calories are adequate Iodine deficiencyis common in regions far from the sea for example parts of the Andesin South America Iron deficiency is a particularly serious problemamong women of childbearing age all over the world and vitamin Adeficiency is common in several countries

Consequences of Hunger and MalnutritionStunted growth reduced physical and mental activity muscle wast-ing increased vulnerability to infections and other diseases and in se-vere cases death are the most common consequences of calorie defi-ciencies Death most frequently results from dehydration caused bydiarrhea whose severity is closely linked to malnutrition Chronic pro-tein malnutrition results in stunted growth skin rash edema and changeof hair color A diet relatively high in calories but low in protein canresult in an illness known as kwashiorkor while a diet low in both calo-ries and protein can result in an illness known as marasmus People canlive about a month with kwashiorkor 3 months with marasmus 7ndash10million people die each year from the two diseases

Iron deficiency anemia affects muscle function and worker pro-ductivity Vitamin A deficiency is a leading cause of childhood blind-ness and often results in death due to reduced disease resistance Io-dine deficiencies cause goiter and cretinism

There is little doubt that hunger and malnutrition result in severephysical and mental distress even for those who survive the infectionsand diseases Malnutrition can affect the ability of a person to workand earn a decent livelihood as mental development educationalachievement and physical productivity are reduced People withsmaller bodies because of inadequate childhood nutrition are paid lessin agricultural jobs in many countries Lower earnings perpetuate theproblem across generations leading to a vicious cycle of malnutritionand poverty

Measuring Hunger and MalnutritionMeasuring the extent of hunger and malnutrition in the world is diffi-cult Disagreement surrounds definitions of adequate caloric and pro-tein requirements while data on morbidity and mortality reflect thecombined effects of sickness and malnutrition


35

Nutritional assessments are usually attempted through food bal-ance sheets dietary surveys anthropometric surveys clinical exami-nations and administrative records Food balance sheets place agricul-tural output stocks and imports on the supply side and seed for nextyearrsquos crops exports animal feed and wastage on the demand sideDemand is subtracted from supply to derive an estimate of the balanceof food left for human consumption That amount left can be balancedagainst the Food and Agricultural Organization of the United Nationsrsquo(FAO) tables of nutritional requirements to estimate the adequacy ofthe diet This method provides rough estimates at best due to difficul-ties in estimating agricultural production and wastage in developingcountries

Food balance sheets provide only a picture of average food avail-ability Malnutrition like poverty is better measured if the distribu-tion of food intake or of other indicators is also taken into accountAverage national food availability can be adequate while malnutritionis common in certain areas or among particular population groupsEven within families some members may be malnourished while

Woman and child in Ethiopia (photo by Mesfin Bezuneh)


36

others are not To measure malnutrition accurately information onhouseholds or individuals is required

Household and individual information can be obtained from di-etary or expenditure surveys and from clinical or field measurementsof height weight body fat and blood tests These methods are expen-sive and seldom administered on a consistent and widespread basis foran entire country They can be effective however in estimating malnu-trition among population subgroups Since preschool children are mostvulnerable to nutritional deficiencies random surveys to measure ei-ther their food intakes or anthropometry (body measurements) can pro-vide a good picture of the extent of malnutrition Another procedurefor estimating the extent of malnutrition is to utilize existing data inhospital health service and school records Unfortunately these sta-tistics can be biased because the records for rural areas are scarce thepoor are the least likely to have sought medical attention and the qual-ity of the information in the records is uneven For example many coun-tries in Latin America record the heights weights and ages of first-year elementary school children Unfortunately many members of thepoorest populations groups do not attend school Because of these bi-ases estimates of malnutrition among school-aged children generallyunderstate the true problem One reason why malnutrition is misun-derstood is that its measurement is so difficult

CAUSES of POVERTY HUNGER and MALNUTRITIONA variety of factors contribute to poverty hunger and malnutritionbut inadequate income is certainly the most important underlying causeThe World Bank estimates that redistributing just 2 percent of the worldrsquosoutput would eliminate most poverty and malnutrition But such re-distribution would be feasible only if those who now go hungry hadsome way to obtain that food or something to offer in exchange Ifpeople for whatever reason produce too few goods and services theylack income to buy food and they go hungry Even in times of faminedecreased purchasing power rather than absolute food shortages is of-ten the major problem as food may be available in nearby regions In-comes in the affected area have declined so that people cannot afford tobuy food from unaffected areas

Figure 2-2 contains a schematic diagram of the determinants ofhousehold well-being and individual nutritional status Access to pro-ductive assets such as land labor natural resources and the policy re-gime (prices and other factors) determine household income and well-being Income including the value of own production and in-kindtransfers determine how much food can be purchased or consumed by


37

Figure 2-2 Determinants of household well-being and individualnutritional status

the family Total food purchases and consumption do not howevertell the entire story Health status and family food preparation alongwith how food is distributed among members of the family help deter-mine how food available to a family is related to individual nutritionalstatus

Health and MalnutritionPovertyrsquos interaction with malnutrition is often compounded by infec-tious diseases and parasites that reduce appetites cause malabsorptionof food or result in nutrient wastage due to fever and other metabolicprocesses Health problems and malnutrition exhibit a synergistic re-lationship infections and parasites lead to malnutrition while mal-nutrition can impair the immune system thus increasing the risk ofinfection and the severity of the illness3 Measles parasites intestinal

3 See Joanne Leslie ldquoInteractions of Malnutrition and Diarrhea A Review of Researchin J Price Gittinger Joanne Leslie and Caroline Hoisington eds Food Policy Inter-acting Supply Distribution and Consumption (Baltimore Johns Hopkins UniversityPress 1987) pp 355ndash70 for additional discussion


38

infections and numerous other health problems are prevalent in devel-oping countries Many of these health and sanitation problems lead todiarrhea which in turn can lead to dehydration and death Health isdetermined by among other things household sanitary conditionsThese in turn are influenced by family assets and income and by gov-ernment programs There is room for optimism related to many child-hood diseases The World Health Organization reports that because ofsustained efforts to vaccinate children the majority of the worldrsquos chil-dren under one year old are now vaccinated against six common child-hood diseases However the last twenty-five years have seen HIV-AIDSbecome an escalating problem first in Africa and increasingly in AsiaMalaria also remains a serious problem in many countries especiallyin Africa where 14 countries report over 10 percent of their populationsinfected4

Poor Nutritional PracticesIgnorance of good nutritional practices maldistribution of food withinthe family and excessive demands on womenrsquos time can all contributeto malnutrition and perpetuate poverty The results of studies that haveexamined each of these factors provide conflicting evidence as to theirimportance Each factor is undoubtedly significant in some areas of theworld but not in others For example in parts of Northern India andBangladesh evidence indicates that adult males receive a dispropor-tionate share of food in the family compared to young females but thisis not universally the case5 Problems that appear to be related to igno-rance and are in fact discriminatory are sometimes related to cultureand often to poverty

Some evidence shows that whether the male or female controlsincome within a family helps determine how food is distributed Therealso is strong evidence that increased educational opportunities forwomen are linked to improved nutritional practices and more equi-table distribution within the family

Seasonal and Cyclical HungerAs with poverty many people in developing countries move in andout a state of malnutrition There are hungry seasons hungry yearsand hungry parts of the life cycle A given individual may or may notsurvive these periods and frequently experiences lasting physical men-tal and emotional impacts even if he or she does survive

4 UNDP Human Development Report 2005 (New York Hoechstetter 2005)5 See Michael Lipton ldquoVariable Access to Foodrdquo in Gittinger Leslie and Hoisington

eds Food Policy pp 385ndash92


39

Hungry seasons occur because of agricultural cycles In the weeksor months preceding a harvest food can be in short supply This nor-mal seasonality can be exacerbated if crops in a particular year are shortor households are unable to effectively store food or income In certainseasons of the year particularly the rainy seasons disease and infec-tion are more common Likewise droughts floods and insect infesta-tions happen in some years but not in others Young children are vul-nerable in part due to dangers associated with diarrhea Pregnant andlactating women experience extra nutritional demands on their bodieswhile the elderly suffer disproportionately as well particularly if theylack the support of their children

SOLUTIONS to POVERTY HUNGER and MALNUTRITION

PROBLEMSSolutions to hunger and malnutrition problems depend on the typesand causes but alleviation of poverty is needed for a long-term solu-tion Famine relief strategies differ from solutions to chronic hungerand malnutrition but even in famines the poor are most likely to beafflicted Unfortunately there is no magic bullet to the solution of pov-erty A concerted effort across many fronts is required

Raising IncomesLifting vulnerable people out of poverty is central to any long-termstrategy to alleviate malnutrition in the world For subsistence farmersthis strategy implies raising productivity increasing access to land orcreating opportunities to migrate to off-farm employment For the popu-lation in general it implies a need for increased employment opportu-nities combined with higher productivity per person The latter requiresgrowth in jobs and in capital per job in the non-farm sector Enhancededucation an investment in human capital will also increase produc-tivity and incomes Equal access to jobs and expanded economic op-portunities in impoverished regions can also help reduce poverty Eco-nomic growth without increased employment for the poorest segmentsof the population will do little to reduce hunger Programs to increaseemployment and earnings opportunities for women are particularlyimportant partly because these opportunities help accelerate the tran-sition to lower birth rates (for reasons discussed in Chapter 4)

Agricultural ProductionAgricultural productivity is particularly important for the incomes andnutritional status of the poor because in most developing countries the


40

poorest people have no choice but to be farmers and they feed them-selves and their families using their own labor and available land In-creased productivity for those farmers not only raises their incomesand purchasing power but can also lower the price of food for thosewho must buy it to feed their families making it possible for the poorto purchase larger quantities Hence methods for increasing food pro-duction are a major focus of this book Increased use of purchased in-puts improved marketing and credit institutions improved agricul-tural policies better education effective agricultural research and in-vestment in infrastructure such as roads storage and irrigation sys-tems are particularly important

Safety NetsAs noted above much poverty is transitory and caused by fluctuationsin income These fluctuations in turn can have dramatic impacts onnutrition and they can lead to longer-term poverty because householdsoften invoke harmful coping mechanisms to deal with them Safety netprograms such as cash and in-kind transfers public works programsconditional cash transfers and fee waivers for health and educationcan distribute wealth to the most needy and provide insurance againstrisks By protecting vulnerable farmers against the adverse consequencesof risk safety nets allow them to make better investment decisions andadopt new technologies and production practices (such as new seedsand fertilizers) that increase mean incomes Safety nets need to be prop-erly targeted and efficiently administered to avoid waste but muchhas been learned in recent years about their design and implementa-tion Many countries have now successfully implemented them6

Food Intervention ProgramsFood price subsidies supplementary feeding programs and food forti-fication can each help reduce nutritional deficiencies Few developingcountries have come close to eliminating malnutrition without somecombination of these practices However these programs alone cannotsolve problems of chronic malnutrition

General food price subsidies were used in Sri Lanka for severalyears and helped relieve malnutrition and extend life expectancy to aremarkable degree However food price subsidies are expensive and

6 See Margaret Grosh Carlo del Ninno Emil Tesliuc and Azedine Ouerghi For Protec-tion and Promotion The design and implementation of effective safety nets (WashingtonDC The World Bank 2008)


41

even Sri Lanka decided to cut back its general subsidy and instead totarget specific groups A study by the International Food Policy Re-search Institute (IFPRI) of the Sri Lankan food stamp scheme indicatedthat the targeted subsidies did reduce program costs substantially buthad mixed results in reaching the poor7 Food price subsidy schemessometimes lower prices thereby reducing incentives for domestic foodproduction

Several countries have instituted supplementary feeding programsfor vulnerable groups such as children and pregnant and nursing moth-ers In some cases these programs provide food to be consumed in aspecific location such as in schools or health centers while in othersfood may be consumed at home In either case while total family foodconsumption rises that of the food recipient usually grows by less thanthe total donation Some food is shared with family members The evi-dence on supplementary feeding programs indicates that they oftenare associated with measurable improvements in nutritional status butthey tend to be expensive for the benefits received Administration ofthese projects can be very difficult In some cases these programs havebeen assisted with food aid from other countries as discussed below

Another food intervention program involves fortification by add-ing specific nutrients during processing The most successful exampleis iodine fortification of salt to prevent goiter Vitamin A also has provenrelatively inexpensive to add to foods such as tea sugar margarinemonosodium glutamate and cereal products Attempts have been madeto fortify food with iron to prevent anemia but reducing iron deficiencyanemia has proven to be a complex problem In general the effective-ness of adding nutrients to food is reduced by the fact that the poor buyfew processed foods there is often cultural resistance to the fortifiedproduct and the cost of fortification is prohibitive In many cases theldquofortifiedrdquo food has been shown to have no more nutrients than unfor-tified foods quality control can be prohibitively expensive in develop-ing countries Recent success in incorporating vitamin A and iron intorice through genetic modification provides another avenue for reduc-ing these micro-nutrient problems

Health ImprovementsEfforts to improve sanitation reduce parasite infections and pre-vent dehydration caused by diarrhea can reduce malnutrition and

7 Neville Edirisinghe ldquoThe Food Stamp Scheme in Sri Lanka Costs Benefits andOptions for Modificationrdquo International Food Policy Research Institute ResearchReport No 58 Washington DC March 1987 pp 1ndash85


42

mortality substantially For example oral rehydration therapy involv-ing the use of water salt and sugar in specified proportions to replacefluid lost during diarrhea can significantly reduce diarrhea-relateddeaths Investments in sanitation services such as potable water andlatrines when combined with effective education programs can im-prove nutritional status by reducing diarrhea Better health services suchas immunization programs can reduce the incidence and intensity ofdiseases that contribute to malnutrition

Political Social and Educational ChangesPolitical stability can help alleviate both famine conditions and chronichunger The famine in Ethiopia in 1983 and 1984 was exacerbated bypolitical upheaval that hampered relief efforts The recent famine inNorth Korea also has political roots Because programs to curb chronichunger and malnutrition require long-term commitments they are nec-essarily rendered less effective by political instability Responsible po-litical action can improve income distribution in a country thereby re-ducing poverty and malnutrition

Social cultural and educational factors also come into play Forexample declining rates of breastfeeding in some countries have con-tributed to malnutrition as substitutes can be less nutritionally com-plete are often watered down and in some cases are even unsanitaryIn other cases breastfeeding may continue too long without the addi-tion of needed solid foods While social and cultural factors changeslowly and economic factors influence decisions education can helpIn fact few consumption practices are totally unaffected by educationNutrition education programs especially when combined with income-generating projects or efforts to increase a familyrsquos access to nutrientssuch as home gardening have been shown to lead to improved nutri-tional status

International ActionsInternational actions can help alleviate poverty famine and chronicmalnutrition Because increased incomes are so important to improvednutrition opening of markets in more developed countries and debtrelief are actions that can help especially in the long run Foreign as-sistance can provide short-run relief and when properly designed fa-cilitate long-run development

Reduced barriers by developed countries to imports from devel-oping countries will enable low-income nations to gain greater accessto world markets The foreign exchange earned can be used for devel-opment efforts and food imports when needed


43

Rural Health Center in Colombia

Debt relief is a dire need in many countries particularly wherepast governments were not held accountable for how loans were spentso that the funds were not invested productively When bad debts ariseit is usually in the long-run best interests of both lender and borrowerto share some of the burden of adjustment to reduce expectation ofloan repayment in line with the actual productivity of the loan Formore details on this important topic see Chapter 19

Foreign assistance includes food aid as well as technical and fi-nancial assistance Gifts and loans of food at low interest rates can helpsolve part of the hunger problem if the food assistance is properly ad-ministered Food aid can relive short-term famines and be used insupplementary feeding programs and in other activities such as foodfor work programs to help generate wealth in developing countriesMuch more important for the long run financial and technical assis-tance can help developing countries expand their capital bases andimprove methods for producing food and other products allowing themto import or develop the new technologies they need to break out ofpoverty

SUMMARYIn this chapter the types and consequences of poverty hunger andmalnutrition were examined We now have much better informationon the distribution and extent of poverty Even though it is difficult tomeasure accurately the extent of hunger and malnutrition in the world


44

it is known that chronic malnutrition affects more people than do fam-ines Malnutrition results in reduced physical and mental activitystunted growth blindness anemia goiter cretinism mental anguishand death

The causes of hunger are many but virtually all these causes arerelated to poverty Infections diseases and parasites poor nutritionalpractices and seasonal variability in food supplies all contribute to theseverity of malnutrition Solutions to hunger and malnutrition includeraising incomes increasing agricultural production in developing coun-tries food intervention programs improving health systems politicalsocial and educational changes and a series of international activitiessuch as food aid and other foreign assistance debt relief opening offoreign markets and price stabilization

IMPORTANT TERMS and CONCEPTSAnthropometryChronic malnutritionDebt reliefDietary surveysFamineFood aidFood balance sheetsFood fortificationFood price subsidiesForeign assistanceKwashiorkor marasmus goiter anemia and cretinism

Looking AheadHunger and malnutrition imply a need for food but not necessarily ademand for food unless that need is backed by purchasing power Fooddemand is influenced by income prices population and tastes andpreferences In the next chapter we will examine tools that can helpmeasure or project the extent to which various demand factors af-fect food consumption We will explore how demand interacts withsupply to determine prices The tools discussed are the first of a set oftheories and methods presented in this book that can improve yourability to analyze and not just observe food and development problemsand policies

Maldistribution of foodOral rehydration therapyPolitical upheavalPovertyPrice stabilizationProtein and calorie deficiencySafety netsSeasonal and cyclical hungerSupplementary feeding programsTransitory povertyVitamin and mineral deficiencyVulnerability


45

QUESTIONS for DISCUSSION1 What are the causes of transitory poverty What can be done to

alleviate the problem2 Why is it important to have information on the depth and severity

of poverty in addition to the poverty prevalence3 Has poverty gone down globally over time4 Is famine more widespread today than in the past5 Is protein deficiency a more severe problem in developing coun-

tries today than is calorie deficiency Why or why not6 If people in the United States moved to a diet in which they con-

sumed more grain and less meat would there be more food forpeople in poor countries of the world Why or why not

7 What are the principal causes and consequences of hunger8 How do we measure the adequacy of food availability in a country9 What are some solutions to hunger and malnutrition problems10 How might safety net programs contribute to long-term

development11 Why and how does political upheaval contribute to famine12 What are the major interactions between health and nutritional

problems

RECOMMENDED READINGSFlores Rafael and Stuart Gillespie Health and Nutrition Emerging and

Reemerging Issues in Developing Countries IFPRI 2020 Vision Focus 5February 2001 (Available at website httpwwwifpriorgindex1htm)

Foster Phillips and Howard D Leathers The World Food Problem (Boul-der Colorado Lynne Reinner Publishers 1999)

Grosh Margaret Carlo del Ninno Emil Tesliuc and Azedine OuerghiFor Protection and Promotion The design and implementation of effectivesafety nets (Washington DC The World Bank 2008)

Mellor John W and Sarah Gavian ldquoFamine Causes Prevention andReliefrdquo Science vol 235 (January 1987) pp 539ndash45

Pinstrup-Andersen Per and Rajul Pandya-Lorch The Unfinished AgendaPerspectives on Overcoming Hunger Poverty and Environmental Degrada-tion (International Food Policy Research Institute Washington DC2001) especially Parts 1 and 2 (Available at IFPRI website httpwwwifpriorgindex1htm)

Sen Amartya K Poverty and Famines An Essay on Entitlement and Depri-vation (New York Oxford University Press 1981)


46

Siegel Paul B and Jeffrey Alwang An Asset Based Approach to SocialRisk Management SP Discussion Series 9926 Human DevelopmentNetwork Social Protection Unit the World Bank Washington Octo-ber 1999 67 pp UN Standing Committee on Nutrition Fifth Report onthe World Food Situation Nutrition for Improved Development Outcomes(New York United Nations 2004) 143 pp

UNDP Human Development Report 2007ndash2008 (New York PalgraveMacmillan Press 2007)

World Health Organization World Health Report 2005 Make Every Motherand Child Count (Geneva WHO Press 205) 252 pp


47

Rather than a race between food and population the food equationshould be viewed as a dynamic balancehellip between food supply anddemand mdash J W Mellor and B F Johnston1

THIS CHAPTER1 Discusses the concept of effective demand and the relative impor-

tance of income population preferences and prices in determin-ing the demand for food as development occurs

2 Explains the importance of income elasticities and price elasticitiesof demand for projecting consumption patterns and for develop-ment planning

3 Describes how supply interacts with demand over time to deter-mine price levels and trends

EFFECTIVE DEMAND for FOODThe need for food and the effective demand for food are related butdistinct concepts Food needs correspond to the nutrient consumptionrequired to maintain normal physical and mental growth in childrenand to sustain healthy bodies and normal levels of activity in adultsThe effective demand (often just called demand) for food is the amountof food people are willing to buy at different prices and income levelsgiven their needs and preferences

In this chapter we consider the means for analyzing food demandchanges resulting from income and price changes The goal is to helpyou predict the likely impacts of a change in either factor on consump-tion Later wersquoll see how these food demand pressures interact with

CHAPTER 3

Economics of Food Demand

1 John W Mellor and Bruce F Johnston ldquoThe World Food Equation Interrelationsamong Development Employment and Food Consumptionrdquo Journal of EconomicLiterature vol 22 (June 1984) p 533

48

feed and bio-fuel demand and with supply conditions to determinechanges in economic well-being

Determinants of Food DemandThe quantity demanded of food or of any commodity is influencedby two major factors its price relative to all other goods and con-sumersrsquo incomes relative to all prices In order to isolate each effecteconomists use a thought-experiment in which we imagine a changein only one variable at a time and trace out the resulting change inanother

When considering the effect of a change in price on quantity con-sumed we expect a higher price to cause a lower quantity consumedand vice versa This inverse relationship between price and quantityconsumed is often called the law of demand and is illustrated on a graphusing a market demand curve (Fig 3-1) The slope and location of the

Figure 3-1 Hypothetical demand curves for a commodity A reduction in theprice of the commodity all other things being equal will cause a movementalong a demand curve say from point A to point B and an increase in quan-tity demanded Changes in the determinants of demand mdash population in-come prices of other goods and preferences mdash can cause a shift in de-mand say from point A on demand curve D to point Arsquo on demand curve Drsquo


49

market demand curve are determined primarily by income per personthe number of people and the distribution of income among thosepeople prices of other goods and other factors such as consumer pref-erences and consumption technologies Changes in any of these factorscause the demand curve to shift as shown by the shift from curve D tocurve Drsquo in Figure 3-1 Such a shift might be caused by a rise in incomewhich increases the quantity demanded at a given price Alternativelythe shift might be caused by population growth at a constant per-capitaincome This income effect on demand varies by commodity Becausethe influence of income on food demand is not constant across coun-tries within countries or by commodity it is important to have a mea-sure of the sensitivity of demand for food and for particular goods tochanges in income The measure used is called the income elasticity ofdemand

Income Elasticities of DemandThe income elasticity of demand is defined as the percentage by which thequantity demanded of a commodity will change for a one percent changein income other things remaining constant2 For example when per-capita income increases by 1 percent if quantity demanded of a com-modity increases by 03 percent its income elasticity of demand is 03Typically for a very low-income country the elasticity of demand forfood as a whole is around 08 while for a very high-income country it isaround 01 This difference in income elasticities means that changes toincome have a much larger relative impact on food demand in low-income countries than in high-income countries

By necessity poor people have no choice but to spend the bulk oftheir income on food mdash at times as much as 80 percent mdash and whentheir incomes rise they spend a high proportion of that increase on morefood Eventually however further increases in income tend to be spenton other things This change in the proportion of the familyrsquos budgetspent on food or Engelrsquos law says that as income increases people spenda smaller proportion of their total income on food This process is re-flected in Fig 3-2 which shows the percentage of total income spent onfood for a number of countries with different levels of per-capita in-come The distinct downward slope associated with Engelrsquos lawwould be similar if the graph were constructed for individuals within

2 If we define n to be the income elasticity of demand for a good Q to be the change inquantity demanded for that goodand I to be a change in income then


50

a country where richer people spend a smaller fraction of their incomeon food

Engelrsquos law reflects in part the limited capacity of the human stom-ach but note that total expenditures on food generally continue to risewith income even as the proportion of the budget spent on food de-clines Rising incomes lead people to consume more total calories andalso to consume more expensive foods These foods are often morehighly processed (for example as people switch to bread instead ofporridge) and include more animal products (meat dairy eggs andfish) as well as more fruits and vegetables The transition in consump-tion from a few inexpensive starchy staples such as cassava rice orcorn to this greater variety of more expensive foods is known as Bennettrsquoslaw named after the same MK Bennett mentioned in Chapter 1 Butnote that when consumers switch from starchy staples to animal prod-ucts demand for animal feed can rise very fast consumers may reducetheir direct consumption of cereal grains as food while increasing theirtotal usage of cereal grains as animal feed

Diversification and improvement of the diet with rising incomesimplies that income elasticities vary by commodity and by income levelTo show patterns of demand among some of the poorest people in the

Figure 3-2 Relationship between private consumption and percentage ofincome spent on food most countries (Source World Bank Indicators on-linedatabase 2005 and USDAERS 2008)


51

Table 3-1 Selected Income Elasticities of Demand

for Agricultural Commodities in Sub-Saharan Africa

Region Wheat Rice Maize Millet Roots Pulsesand tubers

The Sahel 092 093 046 015 mdash 004 mdash 014West 087 065 015 009 012 042Central 055 093 066 028 mdash 021 014Eastern 051 058 028 001 029 002Southern 146 056 035 017 mdash 015 mdash 0002

Source Cheryl Christensen et al Food Problems and Prospects in Sub-Saharan AfricaThe Decade of the 1980rsquos US Department of Agriculture Economic Research Ser-vice Foreign Agricultural Research Report No 186 (Washington DC August 1981)

Table 3-2 Selected Income Elasticities of Demand for Cereals

and Livestock Products in Various Counties

Country Cereals Beef Pork Poultry Cowrsquos Eggs

milk

Brazil 015 058 029 064 045 055Egypt 004 080 070 130 100 070India 025 120 080 150 080 100lndonesia 029 150 080 150 020 120Kenya 035 100 070 120 059 130South Korea 009 080 073 100 049 080Malaysia 014 049 041 087 057 073Mexico -010 059 049 093 068 059Nigeria 017 120 100 100 120 120Philippines 022 120 093 100 150 100Thailand 006 056 047 050 080 050Turkey -005 080 050 120 080 080

Source J S Sarma Cereal Feed Use in the Third World Past Trends and Protections to2000 International Food Policy Research Institute Research Report No 57 ( Washing-ton DC December 1986) p 64

world Table 3-1 provides examples of estimated income elasticities invarious regions of Sub-Saharan Africa for a range of commodities Esti-mated income elasticities of demand for other countries and commodi-ties are presented in Table 3-2 Note that income elasticities for animalproducts are higher than for food grains and root crops Wheat and riceincome elasticities tend to be higher than those of coarse grains whileroots and tubers have consistently small elasticities The substantialvariation in income elasticities across countries reflects differences in


52

income and in preferences for foods For example the income elastic-ity of demand for beef is low in Latin America compared to Africapartly because initial levels of beef consumption are high in LatinAmerica

Most of the estimated income elasticities in Tables 3-1 and 3-2range between 0 and 1 These goods are called normal goods Goodswith income elasticities greater than 1 are called superior and repre-sent foods that can be thought of as luxuries in the diet in a particu-lar country If the income elasticity is less than 0 the goods are calledinferior because consumption of them actually declines as incomeincreases

The fact that income elasticities vary by commodity means thatincreases in income will result in an asymmetrical expansion in demandfor different commodities Demand for some commodities will expandby a greater percentage than that for others Depending on the natureof supply asymmetric expansion of demand can cause different pres-sures on commodity prices These changes in commodity prices caninfluence which crops producers grow and can help determine the di-rection of development

Price Elasticities of DemandSo far wersquove focused on per-capita income as the major determinant offood consumption per person but quantity demanded also respondsto price changes That price response was represented by movementsalong the demand curve in Figure 3-1 such as movement from point Aat a high price to point B with a relatively low price and a higher quan-tity demanded The degree of response in demand from a change inprice is measured by the (own) price elasticity of demand defined as thepercentage change in quantity demanded of a commodity given a onepercent change in its price other things remaining unchanged3 For ex-ample an own-price elasticity of -05 means that with a 1 percent changein price the quantity demanded will change in the opposite directionby 05 percent Own-price elasticities are typically negative reflectingthe negative slope of the demand curve If the own-price elasticity ofdemand is greater (in absolute value) than one the demand is said tobe elastic If it is equal to one it is said to be unit-elastic If it is less than

3 If we define E to be the price elasticity of demand for a good ldquoQ to be the change inquantity consumed and ldquoP to be the change in its price then


53

Potatoes in Ecuador

one it is said to be inelastic In a demand curve such as shown in Figure3-I an elastic demand has a relatively flat slope as small price changeslead to large quantity changes

Price elasticities of demand are useful for projecting demandchanges that might result from policies that manipulate prices or fromsupply shifts Cross-price elasticities which represent the percentagechange in quantity consumed of one commodity for a one percentchange in the price of another commodity holding all else equal alsoare important4 If the cross-price elasticity of demand is greater thanzero the two commodities are said to be substitutes If the cross-priceelasticity is zero the commodities are unrelated and if it is less thanzero they are called complements

When the price of a commodity changes the change in relativeprices causes most consumers to adjust the composition of the com-modity bundle they purchase so that they buy less of the good thatincreased in price This substitution is known as the substitution effectAlso if the price of a commodity increases the real purchasing powerof a given amount of income is reduced causing demand to changebecause of an income effect In most cases this income effect is a second

4 If we let E12

= the cross price elasticity for commodity 1 as the price of commodity 2changes DQ

1 = the change in the quantity demanded of commodity 1 as DP

2 = the

change in price of commodity 2 then


54

factor that reduces demand for the commodity experiencing the priceincrease5 For inferior goods however mdash commodities such as potatoesand cassava mdash the income effect may work in the opposite directionand partially offset the reduced consumption induced by the relativeprice increase

A price increase for a good will increase consumption of substi-tutes and decrease consumption of complements Part of these con-sumption changes are caused by changes in relative prices and part ofthem are due to income effects Because the income elasticity of de-mand for food is large for lowshyincome consumers and because theyspend a high proportion of their income on food low-income consum-ers often make larger adjustments in their commodity purchases thando high-income consumers when prices change

Obtaining Elasticity EstimatesThe effects of the changes in consumer behavior discussed above haveimportant implications for food policies and nutrition in less-devel-oped countries so food-policy analysts often need updated local esti-mates of the sizes of the income elasticities own-price elasticities andcross-price elasticities of demand for various commodities For exampleif a policymaker wants to project domestic food demand and the in-creased production or imports needed to meet that demand the in-come elasticity of demand for food is one of the pieces of informationneeded If an estimate of the effect on the calorie and protein intakes ofthe poor resulting from a decrease in the price of rice is needed it isimportant to have the own-price elasticity of demand for rice and thecross-price elasticities of demand between rice and other major foodsin the country disaggregated by income group

How are elasticity estimates obtained There are several ap-proaches and the appropriate procedure to use depends on the dataavailable and the questions being asked One type of estimate uses na-tional aggregate data on consumption production trade and pricesOften these data are published by international sources for severalcountries If data are available on the same factors for several countriesor for several regions in one country for one period of time they arecalled cross-sectional data If data are available for the same factors for

5 If the consumer is also a producer of the good which is often the case in rural areasof developing countries this income effect can be positive Commodity price in-creases can actually raise disposable income by increasing farm profits This profiteffect can be important when examining price responses among agricultural house-holds that both consume and produce goods


55

one country for several years they are called time-series data Often wehave combined cross-sectional and time-series data that is time-seriesdata for the same factors for a number of countries at the aggregatelevel These aggregate data are not very useful for studying short-termconsumption behavior for commodities within countries because tastesand preferences vary by country However the data may be helpful inmaking long-term projections

Sometimes household-level cross-sectional data are obtained bysampling many households to obtain information on income expendi-tures on different commodities prices paid and educational levels andother demographic characteristics6 Occasionally the data are collectedover time as well although not often because of the cost involved Ifone is interested in microeconomic issues associated with consumerbehavior for different income groups these household-level data arepreferred

Data (aggregate or household-level) are usually analyzed graphi-cally and then in a statistical or econometric (statistical model which in-corporates economic theory) model containing a set of demand equa-tions7 These equations include variables representing the factors men-tioned above Elasticities are calculated from the estimated coefficientsThese elasticities can be used for a variety of policy and planning pur-poses Sometimes when data do not exist in one country or at a periodin time studies from other countries or at a different period of time areused Elasticities from other studies may not be ideal but they are fre-quently used

Some countries have serious deficiencies in aggregate and house-hold-level data Often these data are unreliable or even nonexistentPolicy analysts who have little time or money to collect new data andestimate a model sometimes rely on relationships from economic theoryto obtain rough approximations of missing elasticities For example thereis a useful working assumption (called the homogeneity condition) thatthe sum of the own-price elasticity the income elasticity and the cross-price elasticities of demand for a commodity is equal to zero8

6 Collecting household data is a difficult and costly undertaking For an excellent over-view of topics in household data collection see Joachim von Braun and DetlevPuetz Data Needs for Food Policy in Developing Countries (Washington DC Interna-tional Food Policy Research Institute 1993)

7 See Angus Deaton The Analysis of Household Surveys (Baltimore Johns Hopkins Uni-versity Press 1997) especially Ch 1 for an advanced treatment of types of dataand their uses for policy analysis

8 That is for the ith commodity out of T commodities


56

Typically the sum of the cross-price elasticities for a commodity isgreater than zero and the own-price elasticity is negative Therefore theabsolute value of the own-price elasticity is usually larger than the incomeelasticity of demand One may have an estimate of the income elastic-ity of demand but not the own-price elasticity The homogeneity condi-tion can be used to obtain a rough estimate of the size of the price elas-ticity of demand given that income elasticity and assumptions aboutcross-price elasticities The homogeneity condition is just one exampleof the use of demand theory The main points are that data availabilityand quality limit the potential for economic analysis but a variety oftechniques can often be exploited to interpret the available data in use-ful ways

USING CONSUMPTION PARAMETERS for POLICY and

PLANNINGThe purpose of obtaining income and price elasticities is to assist withpolicy analyses and planning A variety of questions can be answeredwith the help of these elasticities For example what will happen to theconsumption of rice wheat sugar or meat when income rises Whatwill happen to the aggregate demand for food How will the demandchange for different commodities as absolute and relative prices changeWhat will be the effects of price and income policies on the poor Theanswers to these questions help policymakers anticipate future demandchanges and production needs and provide information for designingprice and income policies (see Box 3-1)

Income-Induced Changes in the Mix of Commodities

DemandedFor commodities with high income elasticities demand can grow veryrapidly when income rises Anticipating income growth policymakersmay want to support research or use other means for encouraging in-creased production of those commodities Otherwise prices will rise orimports increase in response to demand growth

Many highly income-elastic commodities such as milk and veg-etables have high nutritional value However some goods with rela-tively high nutritional value have low income elasticities9 If a govern-ment wants to increase consumption of a good with a low income

9 Elasticities reflect peoplersquos preferences for different attributes of the good includingtaste convenience and nutritional value A low value for an elasticity in not neces-sarily ldquobadrdquo it reflects consumer choices given income preferences prices andinformation about the good


57

BOX 3-1

IMPACTS of RICE PRICE POLICY on the POOR in THAILANDAngus Deaton used household-level data from Thailand to examine howpolicies affecting the price of rice would affect households in rural andurban areas and at different levels of income Because rural householdsare both producers and consumers of rice increased prices may or maynot benefit them They will gain as producers but lose as consumers (allurban rice consumers will lose as a result of higher rice prices) The key tothe analysis is to determine the net benefit ratio or the difference be-tween the value of production and the value of consumption divided bytotal household expenditures This ratio varies by total household incomeand the analysis shows that middle income producers will benefit mostfrom rice price increases High-income rural households benefit very littlefrom high prices (they earn their incomes outside agriculture or do notproduce much rice) Very low income rural households benefit by relativelysmall amounts because their marketed surplus is low Compared to plan-tation-type products (such as sugar and bananas) where product priceincreases benefit larger-scale producers rice price policy has its strongestimpact on the middle of the income distribution in rural areas of ThailandThe study shows that the impacts of price policy depend on the commodityin question and the socioeconomic conditions of producer and consumergroups

Source Angus Deaton The Analysis of Household Surveys (Baltimore JohnsHopkins University Press 1997) pp 187ndash90

elasticity it may have to resort to educational or subsidy programsEducational programs help change peoplersquos perceptions about physi-cal (nutrient) needs and the amount of these needs the food providesThese programs essentially lower the costs associated with acquiringinformation about nutrient needs and food nutrient content

At the world level differences in income elasticities by commod-ity imply that as per-capita income grows over time a relative shift willoccur in demand toward agricultural commodities with high incomeelasticities Many of these are high protein foods such as livestock prod-ucts One can also expect the grains fed to livestock such as corn toincrease in demand relative to food grains such as rice These types ofchanges have already been occurring over the past several years

Another impact of these patterns of income elasticities is that theaverage income elasticity of demand for food grains will decrease asdevelopment occurs Small income elasticities are associated withsmall price elasticities of demand With lower price elasticities increased


58

production of food grains would put sharp downward pressure on theirprices Lower prices should help poor consumers who continue to spendlarge shares of their budget on grains but may force many of the farm-ers producing these grains to switch to other commodities or leave ag-riculture

Changes in Aggregate Food Demand as Development

Proceeds10

The demand for food is influenced by population per-capita incomeprices and preferences As development proceeds the two primaryfactors shifting the demand for food outward are increases in popula-tion and in per-capita income These two major forces are captured bythe simple relation D = p + ng where D = rate of growth in the demandfor food p = rate of population growth n = income elasticity of de-mand for food and g = rate of increase in per-capita income

In the above equation population influences food demand in twoways First as presented by the term p it causes a proportional increasein demand However per-capita income equals total income dividedby population Therefore the net effect of population growth will notbe a proportional increase in demand because population growth mayslow the rate of per-capita income growth

Cattle in Colombia

10 Material in this section draws on John W Mellor Economics of Agricultural Develop-ment (Ithaca NY Cornell University 1966) pp 73ndash9


59

At the extreme if income does not expand at all with increasedpopulation the drop in per-capita income will almost completely nul-lify the direct effect of population growth For example developingcountries often experience a population growth rate of 3 percent peryear during the early stages of development The income elasticity ofdemand for food may be as high as 09 If total income remains con-stant then per-capita income will decline by 3 percent and the rate ofgrowth of demand will be D = 3 + 09(-3) = 0311

On the other hand if per-capita income is growing at 3 percent peryear while population is also growing at 25 percent (rates that are notuncommon in middle-income developing countries) even if the incomeelasticity of demand for food drops to 07 the rate of growth in demandfor food would be 46 percent per year Few countries have been able tomaintain such a rate of growth in agricultural production over timeThus food imports may be needed to meet growing demands

These examples ignore the fact that income growth in most less-developed countries is heavily dependent on agricultural output Ifagricultural output fails to grow per-capita income will grow veryslowly As development proceeds the proportion of employment andof total national income derived from agriculture shrinks Even so to-tal per-capita income still may be affected by the rate of growth of agri-cultural production because agriculture provides food capital and amarket for non-agricultural products These issues will be more fullydiscussed in subsequent chapters

The determinants of food demand are interrelated but as devel-opment proceeds certain patterns tend to hold for some of these fac-tors (see Table 3-3) As incomes increase population growth rates gen-erally increase slightly at first as death rates decline For a number ofreasons discussed in the next chapter population growth rates eventu-ally fall as income continues to grow The rate of per-capita incomegrowth is frequently highest in the middle-income countries and theincome elasticity of demand for food declines continually as incomegrows The result is that the rate of growth in food demand is highestfor middle-income countries These are the countries that are most likelyto need food imports Data indicate that middle-income countries fre-quently exhibit the largest increase in per-capita income and food im-ports even though they also experience the largest increases in agricul-tural production

11 The negative consequences of such a scenario should be obvious total demand willincrease by 03 percent but per capita demand will decline by 27 percent


60

DEMAND for FARM PRODUCTS for NON-FOOD or FEED

USESMany agricultural products are used not only for food and feed but forindustrial purposes such as starch fiber and energy In recent yearsfoods crops such as maize soybeans and sugarcane have increasinglybeen diverted to production of bio-fuels such as ethanol and bio-dieselAs the demand for these energy products grows it competes directlywith the demand for food and feed driving up the overall demand(and prices) for farm products as growth in supply has not been able tokeep up with growth in overall demand and the supply of agriculturalproducts for food and feed is diverted to bio-fuels

Demand for bio-fuels has grown because the demand for en-ergy has risen due to population and income growth around theworld while energy mdash primarily oil and gas mdash supplies have notgrown as rapidly thus driving up the price of energy products Tech-nology to produce ethanol and biodiesel has improved over time sothat the net energy balance (energy used to produce as compared toenergy obtained from a gallon of bio-fuel) has become more favor-able reducing the cost of supplying bio-fuels Governments led bythe United States and Brazil have also subsidized research on andproduction of bio-fuels

At any given time speculators are also in the market driving pricesup or down as they make bets on the future supply and demand situa-tions for energy products Due to speculation and uncertainty pricesmay rise above or drop below the level that fundamental supplyand demand factors would dictate they should be However prices

Table 3-3 Comparison of Growth of Demand for Agricultural

Goods Hypothetical Cases

Levels of Rate of Rate of Income RateDevelopment population per capita elasticity of growth

growth income growth of demand of demand

Very low income 25 0 10 25Low income 30 10 09 39Medium income 25 40 07 53High income 20 40 05 40Very high income 10 30 02 13

Adapted from John W Mellor Economics of Agricultural Development (Ithaca NYCornell University Press 1966) p 78


61

eventually adjust (and remove over-adjustment) as new informationbecomes available A good example is the price patterns for maize ricesoybeans and other basic cereals in 2007ndash2008 Grain prices rose sharplyin those years after being relatively constant for several years Funda-mental demand forces mdash such as increased population and incomes inseveral countries and increased demand for bio-fuels mdash combined withsupply factors such as slow growth in productivity higher input costsand poor weather in major producing countries to drive up grain pricesHowever prices were driven even higher than they would have beenotherwise for several months due to speculation In the section belowwe examine further how demand and supply factors interact to deter-mine price

INTERACTIONS between DEMAND and SUPPLYIf markets operate freely with numerous buyers and sellers supply in-teracts with demand to determine the quantity supplied and demandedas well as the price Market supply is defined as the amounts of a prod-uct offered for sale in a market at each specified price during a speci-fied period of time (see Fig 3-3)

A given supply curve assumes that the following factors are heldconstant (1) technology of production (the way the good is produced)(2) prices of inputs used in production (3) prices of products that maybe substituted in production and (4) number of sellers in the marketChanges in these factors can cause the supply curve to shift inward oroutward For food as a whole changes in technology are a major factorcausing shifts in supply over time A new technology that lowers thecost of production will shift the supply curve downward to the right(such as from supply curve 1 to supply curve 2 in Fig 3-3)

Price and Policy ImplicationsThe rate of growth or decline in agricultural prices over time dependsin large part on the net effects of supply and demand shifts (see Figure3-4) Because of outward shifts of the demand curve caused by popula-tion and income growth it is unlikely that agricultural prices will expe-rience major declines resulting from supply growth in a country dur-ing the early stages of development12 If the supply curve for food shiftsout very little population- and income-driven demand growth could

12 However there may be substantial local or regional variation (see Box 3-2) andagricultural prices in a country may go up or down as well due to changes insupply and demand in international markets


62

Figure 3-3 Hypothetical supply curve for a commodity An increase in theprice of the commodity all other things being equal will cause a movementalong a supply curve say from point A to point B and an increase in quantitysupplied Changes in the determinants of supply mdash technology input pricesother output prices number of sellers mdash can cause a shift in the supplycurve say from A along supply curve I to Arsquo along supply curve 2 or viceversa if there is a worsening of productivity

lead to price increases especially if a country has isolated its marketsfrom world markets However these increases are likely to be smallbecause of the close relationship between agricultural productiongrowth and income growth during early stages of development Asnoted earlier it is difficult to get large increases in income and there-fore effective demand without corresponding increases in agriculturalproduction

Other important determinants of the effect of supply and demandshifts on agricultural prices are the elasticities of supply and demandThe more elastic the supply curve (roughly the flatter it is in Figure 3-4) the less prices will change as demands grow Open economies (thosewhere imports and exports are common) tend to be characterized by


63

Figure 3-4 Hypothetical supply and demand curves for a commodityChanges in determinants of demand mdash for example income and populationmdash can cause a shift in demand while changes in the determinants of supplymdash for example technology mdash can cause a shift in supply When both areshifting whether the net effect is a price increase or decrease (whether A ishigher or lower than C) depends on the relative size of shifts of supply anddemand and the slopes of the curves

more-elastic commodity supplies One means of minimizing demand-induced price increases is to permit food imports Another is to in-crease the responsiveness of the food production sector Howeveropen economies are also susceptible to sizable price swings if changesin supply and demand occur elsewhere in the world These implica-tions are examined in greater detail in Chapters 16 and 17

The expected relative stability in food prices during the early stagesof development (except as prices are affected by short-run phenomenasuch as weather or by international forces) implies a need to place em-phasis on policies to shift out the agricultural supply curve and to raiseincomes rather than on pricing policies Thus the focus of public in-vestment needs to be where the return is highest whether it is inside oroutside agriculture Because it is difficult to increase incomes of the


64

poor without increasing employment the country may need to focusinvestments on labor-intensive commodities and industries

As development proceeds incomes grow and demand shifts out-ward the possibilities for rapid increases in food prices arise even incountries experiencing rapid growth in agricultural production Thereasons for this were discussed earlier and illustrated in Table 3-3Middle-income countries experiencing rapid rates of income growthare likely to need increased agricultural imports

Eventually when high income levels are reached income elastici-ties of demand for food and population growth rates become smallerThese small income elasticities relieve the upward pressure on foodprices but create the potential for food surpluses and low farm pricesPolicies at this stage tend to be concerned with easing the cost of adjust-ing large portions of the labor force out of agriculture directing pro-ducers into those commodities for which the country has a relative ad-vantage in world markets and stabilizing domestic farm prices which

BOX 3-2

MARKETS and REGIONAL PRICE VARIATIONDeveloping countries are often characterized by poor transportation sys-tems sparsely populated areas or isolated pockets of high population den-sities and limited means of knowing what economic conditions exist in theseisolated regions Because of these factors regional food markets tend tobe isolated and independent Prices can vary widely from region to regionwith little relationship to average national prices and quantities or to thoseprices prevailing in markets in large cities In addition local prices tend tobe more variable than national prices since with few market participantschanges in behavior by small numbers of participants can affect prices

The consequences of these market problems can be high regionalfood prices and less ability to meet consumption needs for given incomesHigh price variability causes uncertainty to producers and consumers ofthe products These factors worsen national welfare and can cause iso-lated pockets of poverty Increases in national supply will do little to im-prove such situations

Regional supply differences caused by high marketing costs due topoor transportation systems can only be lowered by improvements in infra-structure and market information Poor information causes these differ-ences when costs associated with gathering price and demand informa-tion impairs the effectiveness of the marketing system Measures to en-hance information flows include collection and dissemination of market-related information and telecommunications systems to transmit the infor-mation


65

tend to be more heavily influenced by swings in international pricesnow than they were in the past

The existence of structural changes in the market for agriculturalgoods over time suggests a strong need to tailor development policiesto each countryrsquos stage of development It also suggests a need for eachcountry to consider the stages of development of other countries in theworld and changes in energy markets when making projections aboutfuture demands for agricultural products

SUMMARYThe effective demand for food is determined by the physical and psy-chological need for food combined with the ability to pay for it De-mand is influenced by prices population income and preferences Thelevel of per-capita income is a major determinant of food demand inlow-income countries The income elasticity of demand for food variessystematically by income level by commodity and by places and so-cioeconomic groups within a country The income elasticity of demandfor food declines as development proceeds and shifts in consumptionoccur away from starchy staples toward higher-protein foods Own-and cross-price elasticities of demand are useful for projecting demandchanges Several procedures are available for obtaining income and priceelasticities Middle-income developing countries generally experiencethe most rapid rates of growth in demand for food Changes in energymarkets have added an additional factor to consider when projectingfood price changes

IMPORTANT TERMS and CONCEPTSAggregate versus household data Income effectBennettrsquos law and why it holds Income elasticity of demandBio-fuels Law of demandContradictory role of agricultural Major determinants of long-run prices price trendsCross-price elasticity of demand Normal superior and inferiorCross-sectional versus time-series goods data One-price elasticity of demandEconometric model State of developmentEffective demand Substitutes of complementsElastic versus inelastic demands Substitution effectEngelrsquos law and why it holds SupplyFactors that shift the demand curve Use of aggregate versus houseFactors that shift the supply curve hold-level dataHomogeneity condition and its use


66

Looking AheadRapid population growth over the past few years has dramatically in-creased the worldrsquos population and made the task of raising per capitaincome and reducing hunger in some countries more difficult Popula-tion growth is influenced by many factors and several policies havebeen tried or suggested for controlling it In the next chapter you willlearn about population growth including implications for food con-sumption and natural resource use You will examine population pro-jections and policies for the future

QUESTIONS for DISCUSSION1 As incomes increase do people spend greater smaller or the same

proportion of their income on food2 Distinguish between an income elasticity of demand and a cross-

price elasticity of demand3 What tends to happen to the income elasticity of demand for food

as the per-capita income of a nation increases Why4 To estimate the effect on the calorie and protein intake of a popula-

tion resulting from a decrease in the price of rice why is it impor-tant to know something about the cross-price elasticities of de-mand between rice and other major foods in the country

5 Assume the price elasticity of demand for eggs in India is ndash075 Bywhat percentage would the price of eggs have to change to increaseegg consumption by IS percent

6 Do you expect the price of food in the world to be higher or lower10 years from now To answer this question draw a graph withsupply and demand curves and show how you expect the curves tochange over time and why

7 If population is growing at 26 percent per year the income elastic-ity of demand for food is 06 and per-capita income is growing at 4percent per year what would be the growth in demand for foodper year assuming prices remain constant

8 What tends to happen to the mix of foods consumed as per-capitaincome in a country increases Why

9 If agricultural development is successful at increasing the level ofper-capita food production in several less-developed countriesover the next 10 years why might these same countries becomeless self-sufficient in food (have to import more food than before)during that period of time


67

10 Assume you have the following cross-price elasticities for aparticular country

Commodity Cross-price elasticity

Rice and beans ndash 035Rice and wheat 040Rice and chicken ndash 010Rice and milk ndash 005Rice and other goods 0

a You are a planner for the country represented above andyou want to raise the consumption of rice by 6 percent toimprove calorie intake of the population The incomeelasticity of demand for rice is 04 Use the informationabove and the homogeneity condition to determine thenecessary percentage change in the price of rice

b If rice consumption increases by 6 percent what else besidesthe calories obtained from rice would you need to considerwhen assessing the impact on calorie consumption

11 What distinguishes the need for food from the effective demandfor food

12 Which of the following factors shift primarily the demand curveand which factors shift primarily the supply curve per capitaincome changes new technologies population growth tastes andpreferences prices of inputs used in production prices of othergoods consumed prices of substitute goods in production

13 Why is there a close relationship between agricultural productiongrowth and a nationrsquos income growth during the early stages ofdevelopment

14 Even if agricultural production increases rapidly why is it un-likely that countries in early stages of development will experi-ence major price decreases as a result

15 Why do middle-income countries experiencing rapid rates ofgrowth in food production often need food imports while verypoor countries that are experiencing slower rates of food produc-tion growth do not


68

RECOMMENDED READINGSFoster Phillips and Howard Leathers The World Food Problem (Boulder

Colo Lynne Rienner 1999) Chapter 8Mellor John W Economics of Agricultural Development (Ithaca NY

Cornell University Press 1966) Chapter 4Runge C Ford C Benjamin Senauer Philip G Pardey and Mark W

Rosegrant Ending Hunger in Our Lifetime (Baltimore Johns HopkinsUniversity Press 2003) pp 39ndash56

von Braun Joachim Rising Food Prices What Should be Done IFPRIPolicy Brief April 2008 httpwwwifpriorgpubsbpbp001pdf


69

CHAPTER 4

Population

When poverty is tied to rapid population growth rates (as it generallyis) the risk of widespread hunger is ever present

mdash Runge Senauer Pardey and Rosegrant1

THIS CHAPTER1 Presents basic facts about the distribution of the worldrsquos popula-

tion the rate of population growth and the consequences of rapidpopulation growth

2 Explains the determinants of population growth and policies thatcan affect that growth

3 Examines causes and implications of migration from rural to urbanareas

BASIC FACTS about POPULATION GROWTHThe human race dates back about 3 million years During more than 99percent of this time there was virtually zero population growth Aver-age life expectancy was 20 to 25 years and world population probablynever exceeded 10 million people After agriculture replaced huntingand gathering of food around 6000 to 8000 BC population began togrow more quickly because larger numbers of people could be sup-ported by food production By the year 1 AD there were about 300million people and by 1650 500 million

Population began to grow more rapidly during the industrialrevolution in the eighteenth century and really accelerated afterWorld War II when populations in developing countries began togrow dramatically World population reached 1 billion around 1800

1 C Ford Runge Benjamin Senauer Philip G Pardey and Mark W Rosegrant EndingHunger in Our Lifetime Food Security and Globalization (Baltimore Johns HopkinsUniversity Press 2003) p 21

70

2 billion in 1930 and 3 billion in 1960 It grew to 4 billion in 1975 5billion in 1986 6 billion in 1999 65 billion in 2006 and will exceed 7billion around 2013 based on projected future growth rates (see Figure4-1) The rate of population growth in the world peaked at 20 percentper year in 1965 and has declined since then to its current (2009) rate ofabout 12 percent However population itself will continue to grow formany years since the future number of parents will be much larger thanthe current number because of the rapid population growth in the re-cent past

Distribution of the World PopulationThe worldrsquos population is distributed unevenly across the globe re-flecting the degree to which each location attracted migrants andwas able to sustain growth in its local population over time Theearliest human ancestors lived in Sub-Saharan Africa and migratedfrom there to other regions By far the greatest accumulation of popu-lation has occurred in Asia which holds over 60 percent of the worldrsquospopulation and has the highest population densities Large populations

Figure 41 Past and projected world population 1750 to 2150 mediumestimate (Source Population Division of the Department of Economic andSocial Affairs of the United Nations Secretariat World Population Prospects

The 2004 Revision)


71

are also found across Europe along the coasts of North and SouthAmerica and within Africa

The current size and density of the ten most populous countriesare shown in Table 41 The list is dominated by China and India butseveral other Asian countries have large populations and also have veryhigh density with more than 100 people per square kilometer Thesecountries account for the bulk of historical population growth Todaypopulation growth in Asia and elsewhere has slowed and the fastestgrowing countries are mainly in Sub-Saharan Africa (Table 4-2) Theten fastest growing countries are all in Africa with annual rates of popu-lation increase at or above 30 percent per year Such rapid growth isalmost unprecedented in human history It is occurring in the worldrsquospoorest places where purchasing power per capita is below a dollar aday and it is often occurring in places where rapid population growthis a fairly recent phenomenon At the other end of the spectrum theslowest-growing countries and presented in Table 42 Some of thesecountries are actually losing population Countries that have negativepopulation growth rates are mainly the former socialist countries ofEastern Europe but also include some high income countries in Eu-rope (Germany and Portugal)

Table 4-1 The Worldrsquos Most Populous Nations

Mid-2008 population Population densityNation (millions) (peoplekilometer)

China 1325 139India 1149 350United States 305 32Indonesia 240 126Brazil 195 23

Pakistan 173 217Nigeria 148 64Bangladesh 147 1023Russia 142 8Japan 128 338

Total (10 nations) 3952Total (world) 6705 49



72

Table 42 Population Growth Rates in the Worldrsquos Fastest and

Slowest Growing Nations (with 7 Million or More Population)

Fastest growing Annual growth rate Mid-2008 population nations (percentage 2008) (millions)

Mali 33 127Malawi 32 136Yemen 32 222Niger 31 147Uganda 31 292

Dem Rep of the Congo 31 665Benin 30 93Burkina Faso 30 152Burundi 30 89Guinea 29 103

Slowest growing Annual growth rate Mid-2008 population nations (percentage 2008) (millions)

Ukraine ndash 06 462Bulgaria ndash 05 76Hungary ndash 04 100Serbia ndash 04 74Russia ndash 03 1419

Belarus ndash 03 97Romania ndash 02 215Germany ndash 02 822Portugal ndash 00 106Poland 00 381


Consequences of Rapid Population GrowthRapid population growth is a problem for most developing countriesmainly because it changes the age composition of the country with alarger fraction of the population being children Population growthmainly takes the form of a rising number of children and young peoplewhich imposes a strain on the natural resource base increases pres-sures for jobs reduces food production gains per capita contributes topollution and strains the capacity of schools and other social servicesWhile it would be an over-simplification to say that population growthis the root cause of natural resource problems unemployment and soforth it certainly intensifies these problems


73

Fig

ure

4-2

P

op

ula

tio

n g

row

th r

ate

s (

pe

rce

nt)

2

00

7 (S

ou

rce W

orl

d B

an

k W

orl

d D

eve

lop

me

nt In

dic

ato

rs o

n-l

ine

da

tab

ase

)


74

Figure 4-3 Population Profiles Growth and Momentum The age distributionof the people in a country has a major impact on the future rate of growth ofits population The population pyramid is a tool that demographers use to de-scribe this distribution Shown above are two population pyramids reflectingdiffering rates of current and future population growth The broad base onthe Congo pyramid means that there is population growth momentumwhich will cause population to grow even if fertility or the number of childrenthat each family has slows immediately to replacement levels As the largenumber of people in the younger age groups in Congo reach child-bearingage the number of births will rise dramatically even if the number of birthsper couple falls The United States has a relatively even age distribution andis unlikely to experience a large increase in population (Source US CensusBureau 2005)

Differences in age structure associated with different rates of popu-lation growth are illustrated in figure 4-3 Those with rapid growth havelarge numbers of very young children relative to working-aged peopleThis high dependency causes increased current consumption and re-duced savings and investment The impacts of rapid population growthon schooling can be particularly important Since about 25 percent ofthe people in developing countries are of school age compared to 15percent in typical developed countries equal amounts of budget out-lay for education translate either to low expenditures per pupil or lowenrollment rates Inadequate investments in either physical or humancapital will hurt the long-run possibilities for development


75

The argument that most countries need more population to pro-vide labor and markets is not very compelling given the abundance ofunskilled labor relative to capital in many countries and the fact thatincreased consumption of manufactured goods is heavily dependenton per-capita income growth

Hunger famine and poverty were serious problems long beforepopulation began its rapid rise However the population explosion hasmade it difficult for some countries to invest and has magnified thelack of social justice in others

CAUSES of FERTILITY CHANGE and POPULATION

GROWTHPopulation growth occurs for the world as a whole when births exceeddeaths2 Years ago births and deaths were both high on the order of 40to 50 every year per 1000 people in the population About half of thedeaths occurred before age ten and death rates fluctuated from year toyear with contagious diseases and with variations in food suppliesDuring this time population fluctuated but did not grow rapidly forany sustained period of time

Sustained population growth began in Europe and other now-in-dustrialized regions during the eighteenth century with a slow butsteady decline in the death rate Technological and economic progressresulted in improved nutrition and health which reduced infant deathsand extended life expectancy well before scientists or medical doctorsunderstood what caused disease or knew how to cure people once theyfell ill Population growth accelerated as death rates fell with no changein the birth rate for about one hundred years until the late nineteenthcentury when birth rates began to fall as women delayed marriage andhad fewer children (see Figure 4-4) Birth and death rates declined intandem until the 1950s when death rates stabilized and the total popu-lation growth rate slowed It took roughly 200 years for the now-indus-trialized countries to transition from high birth and death rates in theearly eighteenth century to low birth and death rates in late twentiethcentury During this period births exceeded deaths by about 10 per1000 people for a population growth rate on the order of 1 percent peryear

In contrast todayrsquos less-developed countries experienced no sig-nificant decline in mortality until the twentieth century when their deathrates declined more rapidly than they ever had in the now-developedcountries This precipitous drop in the death rate was not due to slow

2 Population in individual countries also depends on immigration and emigration


76

improvements in nutrition and wealth but to the sudden introductionof technological improvements developed through scientific researchOnce scientists and doctors understood the causes of disease and theprinciples of nutrition especially after World War Il countries rapidlydeployed the new antibiotics immunizations and insecticides to con-trol disease-bearing insects They invested heavily in sanitation andmaternal and child health programs After the decline in death rates ittook several decades for birth rates to begin falling mdash but by then thegap between deaths and births was on the order of 20 per 1000 peopleor 2 percent per year and in many countries it was over 3 percent peryear

In summary population growth has been much faster in todayrsquoslow-income countries than it ever was in todayrsquos high-income coun-tries for one reason the low-income countriesrsquo death rates fell fasterdue to the sudden introduction of life-saving technologies It is hard toimagine any serious observer wishing that those techniques had notbeen introduced since they saved millions of lives and made possiblemuch of the population we have today mdash but the speed of introductionmade it relatively difficult for those countries to raise their per-capitaincomes until the transition to lower birth rates could be completed

Figure 4-4 Population growth through natural increase 1850ndash2050 (SourceWorld Bank World Development Report 1980 New York Oxford UniversityPress 1980 p64and UN Population Division World Population Prospects2004 Revision Population Database)


77

The historical demographic transition shown in Figure 4-4 has re-peated itself in country after country Each has a different timing andspeed of transition but all began with high birth and death rates and arelatively stable population size then a decline in the death rate thatinitiates population growth For those countries that have completedthe demographic transition a decline in the birth rate has followedclosing the gap between birth and death rates and stabilizing the popu-lation size at a new higher level

The fact that this demographic transition has been observed inmany countries in the past does not of course guarantee that it will beobserved in the future If population growth outstrips societyrsquos re-sources death rates could rise again and indeed in much of Africa theyalready have due to the ravages of HIVAIDS as well as continuedhigh levels of child malnutrition and disease To understand where andwhen the demographic transition can be completed without rising deathrates we need to examine the causes of fertility (birth rate) changes andconsider policies that might influence those changes

Causes of Fertility ChangesFamily size is largely determined by parental motivation and this mo-tivation reflects rational and in many cases economic decisions Tastesreligion culture and social norms all play a role yet evidence suggeststhat differences in economic factors as well as family planning educa-tion and access to birth control play the major roles Female educationis particularly important in reducing family size

People receive pleasure and emotional satisfaction from childrenThus there is a consumption benefit from having children and in poorsocieties there may be little competition from other consumption goodsIt costs time and money to raise children but these costs (both out ofpocket and in terms of earnings foregone while caring for children) maybe relatively low especially in rural areas

Children are also an investment This investment value increasesthe benefits associated with having children They frequently workduring childhood In rural areas they gather firewood collect waterwork in the field move livestock and do other chores In urban areas achildrsquos ability to contribute work to the family is more limited how-ever income opportunities exist for very young children in urbanareas of most less-developed countries (LDCs) An important sourceof urban employment of children is the ldquoinformal sectorrdquo often in pettytrading and services When older children leave home especially if theygo to the city they may send cash back home Children also provide


78

Child weeding onions in the Philippines

security during old age Most less-developed countries have no socialsecurity system These benefits from additional children raise the num-ber of desired children in less-developed countries especially amongpoor families In many countries child mortality is high so that extrabirths may be necessary to ensure that the desired number childrensurvive All these factors increase birth rates

As people obtain more education and earn more money they de-lay marriage and have fewer children Parents have more options andcome to prefer keeping their children in school rather than earning in-come from childrenrsquos work An increase in per-capita income is inher-ently a rise in the value of time A rise in the value of time particularlyif women have expanded employment opportunities outside the house-hold creates strong incentives to have fewer children and to invest morein the health and education of each child

Thus poverty and high fertility are mutually reinforcing Socialand economic factors such as income literacy and life expectancy ac-count for as much as 60 percent of the variation in fertility changesamong developing countries The strength of family-planning programsalso accounts for a significant share

Birth rates do not decline immediately when incomes begin to in-crease Expectations about desired family size may take years to evolve


79

and in any case they will change at different rates for different socialgroups Within each country people with fewer opportunities mdash espe-cially fewer opportunities for women mdash will often continue to havehigher birth rates than other groups further slowing the transitionAnd of course the speed of reduction in birth rates depends on theavailability of effective family-planning techniques To reduce fer-tility households must both want to reduce their total family sizeand be able to control the number and timing of births through effec-tive contraception

Policies That Influence Population GrowthVirtually everyone favors public and private actions to reduce deathrates but measures to reduce birth rates are more controversial Thecontroversy arises because some question the cost-effectiveness of familyplanning programs and others find efforts to control fertility in conflictwith their strongly held values and beliefs Family-planning programsin at least one country appear to have been coercive and some arguethat more people are needed to provide labor and domestic markets

Those who call for public actions to help curb birth rates arguethat public costs (schools hospitals pollution etc) associated with largefamilies exceed social benefits Therefore society has a right to at leastinform its citizens of ways to control births Evidence from countriesthat have had strong family-planning programs such as Colombia andIndonesia shows that these programs can be effective3

China combined educational programs social pressure and eco-nomic incentives to reduce rates of birth These were effective but manypeople consider Chinarsquos family planning program too strong theyparticularly object to the use of abortion to control family size Thesecritics can point to less-coercive educational programs that appear tohave been equally effective in Sri Lanka in parts of India and in othercountries

Measures to improve income growth and distribution developsocial insurance and pension programs and expand education andemployment opportunities for women are all likely to help reduce birthrates These efforts take time however which is why the policy debateoften centers on family planning issues Increased populations makeall these programs more expensive and difficult to implement so thatcurrent investments in family planning will save money in the long

3 World Bank World Development Report 1984 p 9


80

run Most people in developing countries consider the fertility rates intheir countries too high and only a few consider them too low4

Future Population ProjectionsThe United Nations has projected that by the year 2050 world popula-tion will have grown to around 9 billion people5 Projections vary how-ever from 78 billion to 108 billion due to the uncertainty in factorsaffecting the projections (see Figure 45) Most of the growth will beconcentrated in the developing countries Future population projectionsare uncertain because they depend on income increases educationalimprovements family planning programs and the future progressionof the AIDS epidemic that are hard to predict If present trends in growthrates continue however the middle estimate appears the most likely

URBANIZATIONRegardless of the total increase in population it is clear that urbaniza-tion will continue at a rapid pace and that by the year 2050 the worldwill be substantially more urban While total population in developing

Figure 4-5 Future population projections (Source United Nations WorldPopulation Prospects The 2006 Revision)


4 The Hunger Project Ending Hunger An Idea Whose Time Has Come (New York Praeger1985) p 30

5 United Nations World Population Prospects the 2002 Revision (New York United Na-tions 2003)

81

countries grew roughly 2 percent annually from 1993 to 2008 urbanpopulation grew at an annual rate of more than 3 percent Natural popu-lation increases in urban areas account for about 60 percent of thisgrowth rate and another 8 to 15 percent is attributable to reclassifica-tion of rural areas to urban areas At least 25 percent of the rapid growthin urban areas is caused by migration from rural to urban areas Be-cause a large proportion of the migrants are of child-bearing age a siz-able part of the ldquonatural increaserdquo in urban populations also can beattributed to recent migrants The percentage of urban populationgrowth due to migration is highest in those countries in the early stagesof development

Causes of Rural-to-Urban MigrationRural-to-urban migration is in a broad sense a natural reflection of theeconomic transformation from agriculture to industry that economiesundergo during the development process As we discuss in Chapter 5the process of industrialization increases the demand for labor in themanufacturing and service sectors In the early stages of developmentmuch of this labor must come from the rural areas

By and large people move to urban areas because they expect in-creased economic opportunities in terms of both employment earningsand access to goods or services produced by others Landlessness andrural poverty natural calamities lack of educational opportunitiesunequal public services provision and other factors come into play aswell Although living costs are higher in urban areas migrants aresearching for a better level of living they are pushed out of rural areasby poverty and desperation and pulled to the cities by hope and op-portunity

The vast majority of people who migrate to cities perceive that thebenefits of the move exceed its costs (these costs include foregone ruralincome and the cost of the move) or they would not make the moveMigrants tend to be young disproportionately single and better edu-cated than the average of those left behind The first two of these char-acteristics tend to lower the costs of the move while the third raises thebenefits Better-educated people can expect higher returns from theireducation (wages) in urban areas Most migrants to large cities in de-veloping countries have relatives or friends already living there a factthat tends to lower the cost of the move

Rural-to-urban migration has been persistent despite rising un-employment rates in urban areas The likely reasons for this persistenceare that workers consider both rural-urban wage differentials and the


82

Many of the migrants in Dhaka Bangladeshseek work as bicycle rickshaw drivers

probability of obtaining a job (which is often much less than 100 per-cent) and still perceive that they will be made better off by movingMany of these migrants realize it is unlikely that they will obtain a high-paying or ldquoformalrdquo job immediately but they are willing to work inlow-paying jobs such as selling goods on street corners ldquowatching overrdquoparked cars or doing other jobs in the ldquoinformalrdquo sector For some ofthese migrants these high-paying jobs may come only to their childrenand then only if the children receive a better education than their par-ents had

The importance of educational opportunities and other public ser-vices cannot be overlooked as reasons for rural-to-urban migration Inmany countries an urban political bias has created a large disparitybetween the levels of services including quality of public education inrural and urban areas Furthermore and perhaps more important thepolitical bias extends to economic policies such as pricing policies Foodprices are often kept artificially low (through policies discussed later inthis book) This policy helps urban consumers but discourages invest-ment in food production and lowers incomes in rural areas These dis-tortions help explain some of the attractions of cities

Consequences of Rural-to-Urban MigrationUrbanization per se is not a problem There are economies of scale re-sulting from the concentration of suppliers and consumers for industry


83

and public services Innovative and knowledge-intensive industries aremore likely to form and prosper in high population-density areas Theproblem arises when cities become ldquotoo large too quicklyrdquo often be-cause rural-to-urban migration increases the urban population at a ratefaster than industry schools sewage systems and so forth can expandThe result is substandard housing poor sanitation and lack of otherservices for recent migrants (see Box 4-1) While migrants have beenshown to be assets to the cities the shanty towns that surround almostall large cities in less-developed countries attest to the growing dispari-ties that occur within cities if urbanization occurs too rapidly Manypeople live in absolute squalor often without sewage systems and some-times in garbage dumps The fact that people are willing to live in theseareas highlights the poverty and lack of opportunity in rural areas

Evidence suggests that farm output has not been affected greatlyby the loss of migrants and their labor to urban markets In most low-income countries the number of farmers keeps rising despite rural-ur-ban migration because the total population is growing faster than cit-ies can expand And migrants help sustain their relatives on the farm

BOX 4-1

MEXICO CITY AN EXAMPLE OF RAPID URBAN GROWTHThe situation in Mexico City whose population more than tripled over thepast 25 years is an example of some of the strains imposed by rapid ur-banization The growth of Mexico City outstripped the growth in the avail-ability of services The city opened an ultramodern subway system in 1969began large-scale construction of housing in the early 1970s and inaugu-rated a deep-drainage sewer system that was hailed as an engineeringmarvel in 1975 Now however the subway and other transportation sys-tems are hopelessly overloaded Thirty percent of the families in the citylive in single rooms and fully 40 percent of houses lack sewerage Con-gestion and air pollution are severe water is pumped into the city from asfar away as 50 miles rainwater and sewage are pumped out The sewersystem is so overtaxed that sewers back up and overflow into the streetsduring downpours The cityrsquos garbage dumps are overflowing and thou-sands earn their livelihood by picking garbage at the public dump

Rural-to-urban migration continues in spite of these problems withabout 400000 rural Mexicans moving to Mexico City each year The hopeof a better life provides a strong pull While roughly 23 percent of thecountryrsquos population lives in the city 40 percent of the GDP is producedthere and more than one-third of the factory and commercial jobs is lo-cated in the capital Rural Mexico is very poor with high rates of malnutri-tion low literacy and poor services even compared to the capital


84

when they remit money back to rural areas However some ruralareas have suffered because the brightest and most educated work-ers have migrated

Governments have employed many approaches to the task of slow-ing down rural-to-urban migration Some countries are restricting mi-gration implementing resettlement schemes and providing servicesto smaller towns and cities It appears however that unless the urbanbias in economic policies is removed and economic development pro-ceeds to the point where living conditions improve in rural areas ru-ral-to-urban migration will continue in many countries at a very fastrate

SUMMARYThe current world population of more than 67 billion is growing at anannual rate of 12 percent an extremely high rate by historical stan-dards The developing world is experiencing a population explosioncaused by rapid decline in death rates due to improved health and nu-trition While birth rates have begun to decline due to higher incomesfamily planning education and other factors world population is likelyto continue to grow for more than a century Effective measures to con-trol population growth should consider the economics of fertility andhow different economic and social policies affect childbearing decisionsRural-to-urban migration is proceeding at a rapid rate in many devel-oping countries as migrants seek to achieve higher standards of livingRapid urbanization has caused a strain on public services pollutionand other problems

IMPORTANT TERMS and CONCEPTSBirth rates and death rates Family planningCauses of fertility changes Population densityCauses of rural-to-urban migration Population distributionCharacteristics of migrants Population growthConsequences of rapid population Rural-to-urban migration growth Urban political biasDemographic transition Why death rates decline

Looking AheadThis chapter concludes our overview of several dimensions of the worldfood- income-population problem Hunger and development problemsare both severe and complex We move now to a set of two chapterswhich examine economic theories that have been used in attempts toidentify the heart of the development process We begin in the next


85

chapter with a discussion of important factors related to productiongrowth Subsequent chapters then incorporate these factors into devel-opment theories

QUESTIONS for DISCUSSION1 Has population increased at a fairly constant rate since prehistoric

times2 What is the current world population and how fast is it growing

When will it stop growing3 At present growth rates how long will it take to add 1 billion

people to the world population4 Why is population increasing more rapidly today in LDCs than it

did during early stages of development in Europe and the UnitedStates

5 What are the major determinants of birth rates in LDCs6 What are the impacts of rapid population growth7 What policies can be used to help reduce population growth8 Are population growth rates more likely to increase or decrease

over the next 15 years9 Which are the fastest and slowest growing countries in the world

(in terms of population)10 What proportion of the worldrsquos population lives in Asia11 Why are we seeing rapid rural-to-urban migration in many

developing countries12 What are the consequences of rapid rural-to-urban migration13 Describe the characteristics of the most common type of migrant14 How can high fertility be viewed as a consequence of poverty as

well as a cause of it15 Describe the demographic transition that tends to occur as

development takes place and why it occurs

RECOMMENDED READINGSGelbard Arlene Carl Haub and Mary M Kent ldquoWorld Population

Beyond Six Billionrdquo Population Bulletin Volume 54 No1 PopulationReference Bureau March 1999

Population Reference Bureau httpwwwprborgPopulation Reference Bureau httpwwwprborgPublications

Datasheets20082008wpdsaspxUnited Nations Department of Economic and Social Affairs Population

Division World Population Prospects The 2006 Revision HighlightsWorking Paper No ESAPWP202 2007


86

87

PART 2

Development Theories

and the Role of Agriculture

Rice in Peru

88


89

CHAPTER 5

Economic Transformation

and Growth

Economic growth depends ultimately on the impact of productiveresources and the efficiency with which they are used

mdash Angus Maddison1

This Chapter1 Describes the economic transformation that occurs with economic

development involving a decline in the size of agriculture relativeto non-agricultural activities

2 Introduces the concept of a production function and the law ofdiminishing returns

3 Identifies potential sources of economic growth

THE ECONOMIC TRANSFORMATIONEconomic growth is almost always accompanied by an economic trans-formation from agriculture into other activities As the economy expandsthe agricultural sector grows more slowly than manufacturing and ser-vices and agriculture accounts for a declining fraction of employmentoutput and consumer expenditures The transformation from farm tonon-farm activities as incomes rise applies to regions countries andthe world as a whole It is among the most dependable relationships inthe world economy and has major effects on peoplesrsquo lives This chap-ter explores its causes and its consequences both within agricultureand for society as a whole

The tendency for richer countries to derive a smaller share of theirincome from agriculture is shown in Figure 5-1 and their tendency to have

1 Angus Maddison Economic Progress and Policy in Developing Countries (New York WW Norton and Co 1970) p 34

90

a smaller share of total employment in agriculture is shown in Fig 5-2These two figures show remarkable similarity and an interesting dif-ference The similarity is the clear downward trend All poor countriesderive a significant share of their income from agriculture while allrich countries derive only a small fraction from it Note that agriculturenever disappears entirely in the rich countries and there is wide varia-tion in its share among the poorest countries A key difference betweenthe two figures is that in poor countries agriculture accounts for a largerfraction of employment than of output Roughly speaking countriesbelow $1000 per year in per-capita income have 40-90 percent of theworkforce engaged in agriculture and these people earn 20ndash50 percentof their countryrsquos total income In other words within poor countrieson average each farmer earns roughly half of what non-farmers earn

Causes of the Economic TransformationIn low-income countries labor productivity is low and people out ofnecessity spend a high proportion of their income on food Labor andsmall amounts of land are their primary assets and many have nochoice but to devote at least some of their labor to farming to feedthemselves and their family Many low-income farmers are actually

Figure 5-1 Agriculturersquos share of total output and Gross National Income2007 (Source World Bank World Development Indicators on-line database)


91

Figure 5-2 Agriculturersquos share of total employment and Gross NationalIncome 2005 (Source World Bank World Development Indicators on-linedatabase)

net food buyers using small amounts of non-farm income or the sale ofhigh-valued crops and livestock to supplement the basic foods theygrow on the farm To emerge from poverty these semi-subsistence farm-ers must improve their productivity either on the farm or in non-farmactivities

As the productivity of labor and other factors increases four ma-jor factors drive the transformation from farm to non-farm activitiesThe first factor is that incomes rise due to the productivity increasecausing a gradual shift in demand from food to non-food items Thisconsumption shift occurs primarily because the income elasticity ofdemand for food is less than 10 and tends to decline as income growsDeclining income elasticities mean that for each percentage increase inincome progressively lower proportions are spent on food (see EngelrsquosLaw in Chapter 3) These changes in demands for agricultural and non-agricultural products imply that as development proceeds relativelymore labor inputs and other resources are devoted to non-agriculturalactivities

The second factor driving the transformation is that at any givenincome level the quantity of food demanded changes relatively littlewhen its price changes In other words the price elasticity of demand


92

for food is low less than 10 in absolute value and it may be even smallerat higher levels of income This ldquoprice-inelasticrdquo aspect of food demandmeans that if agricultural productivity grows prices received by farm-ers will fall by a higher percentage than the quantity demanded risescreating incentives to remove resources from farming and transfer themto non-farm activities

These two ldquodemand-siderdquo drivers cannot explain the transition insettings where farmers are selling their produce at prices that are deter-mined in a world market In those cases prices received by farmersdepend little on local demand so there must be ldquosupply-siderdquo explana-tions for the transformation as well

A third supply-side factor driving transformation is specializa-tion Even if the mix of activities in the economy remains the sameduring economic growth the availability of capital and market oppor-tunities allows people to expand production of what they do best andthen trade with others for the products they want to consume Thusfarmers produce less of their own food clothes furniture and so forthand an increasing share of these kinds of activities is re-classified fromldquoagriculturerdquo to ldquoindustryrdquo

Another supply-side factor that could drive transformation is thefact that land supply is fixed while other forms of capital can expandAs people accumulate savings from year to year they find fewer andfewer opportunities to add resources to their farms and so prefer toinvest their savings in non-farm enterprises For example the farmerwho already has good buildings fencing livestock and equipment willtend to invest her savings in something else such as a retail trade orservices

Does Agriculture Actually ShrinkThe fact that having higher incomes leads to a smaller fraction of out-put and employment in agriculture does not mean that the absolutesize of the farm sector declines Indeed as countries get richer the levelof farm production and consumer expenditure on farm goods usuallykeeps rising and in countries with rapid farm productivity growthoutput in the sector can grow as fast as non-farm output As agricul-tural productivity and incomes grow labor is gradually transferred fromwork on farms to work in other enterprises Some of this work occurs inthe same rural areas where the farms themselves are located mdash peoplefind employment in small-scale manufacturing in value-added pro-cessing of agricultural products in transport and services etc Othersas noted in Chapter 4 migrate to cities and find work in the formal andinformal sectors


93

In most countries the land area available for farm use is roughlyconstant over time so any change in the number of farm workers trans-lates directly into a change in number of acres available per workerOne might expect economic development to influence the number ofpeople working on each farm and it does but in an unexpected wayAcross countries and over time the number of workers on each farmstays close to the number of workers in the family Family farming domi-nates the sector and so the number of workers per farm varies withfamily size which tends to decline as the economy grows Thus poorcountries may have five to eight workers per farm while rich countriesmay have only one or two but that is mainly because of the decliningnumber of workers per family Furthermore at every level of incomemany family members work only part-time on the farm and hire them-selves out for off-farm work A few do hired farm work but hired work-ers are less common in agriculture than in other sectors

Family workers dominate farming for many reasons but perhaps theprimary reason is that many field operations are difficult to supervise andmonitor and are therefore done better by self-motivated workers Forexample a farm owner would have great difficulty ensuring that a hired

Figure 5-3 Number and average size of farms in the United States 1900ndash2002 (Source Carolyn Dimitri Anne Effland and Neilson Conklin 2005 The

20th Century Transformation of US Agriculture and Farm Policy [WashingtonDC Economic Research Service USDA])


94

worker plows plants or fertilizes appropriately because these opera-tions are dispersed across the field and many other factors intervene todetermine that fieldrsquos eventual yield

Since family farming dominates the sector any change in the num-ber of farm families translates directly into a change in the averagecropped area per farm Figure 5-3 illustrates this process for the UnitedStates The number of farms peaked in the 1920s but as farm labormoved into cities the acreage per farm increased as exiting farmersrented or sold their land to the remaining operators Note that the de-cline in the number of farmers cannot go on forever In the United Statesthere has been no further decline since 1990 with roughly one-third thenumber of farms as there were in the 1910 to 1920 period and farmsizes roughly three times as large

A great deal of variability in farm sizes over time exists acrosscountries Several middle-income countries in Asia are now in a periodof rapid decline in the number of farmers much like the United Statesin the 1960s The poorest countries however have growing rural popu-lations and fixed land bases Many regions in South Asia and Africahave experienced decades of decline in the available acreage per farmersharply reducing their ability to feed themselves or initiate the economictransformation out of agriculture

Implications of Changes in the Number of FarmersThe key fact about the economic transformation presented above is thatas incomes rise the share of agriculture falls but the absolute numberof farmers rises and then falls The initially rising number of farmers inlow-income countries translates directly into rising number of workersper acre of available land If output per acre cannot rise at least as fastas the number of workers output per worker must fall This down-ward pressure on farmersrsquo income accounts for much of the deteriora-tion in social conditions that we observe in the worldrsquos poorest regions

An essential aspect of rural population growth is that it is tempo-rary If economic development continues eventually non-farm employ-ment becomes large enough to absorb all new workers rural popula-tion growth slows and any growth in output per acre translates di-rectly into growing output per worker Many of the people moving offthe farm incur significant adjustment costs during the transition

The fact that an economic transformation occurs with developmentdoes not explain the sources of economic growth and development Un-derstanding those sources of growth and how they contribute todevelopment requires knowledge of a few basic economic principles


95

related to production economics In the next section we introduce a setof principles that can be used to help explain the output and economiceffects of input and technology choices

EXPLAINING PRODUCTION CHOICESEconomic growth requires transforming a countryrsquos basic productionresources into products and doing so in ever more efficient ways Econo-mists have developed ways to characterize how that transformationoccurs utilizing the concepts of a production function a marginal prod-uct and economic optimality These three basic production economic con-cepts are presented here and then used subsequently in models of eco-nomic growth and development

Production FunctionsProduction requires resources or inputs such as labor natural resourcesand tools or other capital items These inputs are often called factors ofproduction Production also requires that these factors be combined bya producing unit that can organize their use to obtain desired goodsand services A description of the way in which factors of productionare combined to produce goods and services is commonly called a pro-duction function A production function describes for a given technol-ogy the different output levels that can be obtained from various com-binations of inputs or factors of production

The relationship between the level of production that can be ob-tained when only one input is allowed to vary (say labor) while allother inputs are held fixed may look something like that shown in Fig-ure 5-4 This relationship is also referred to as an input response curve ora total product curve In the case of labor when no work is done theproduction level is usually zero so the input response curve starts atzero Output may then rise at an increasing rate showing ldquoincreasingreturnsrdquo to each additional unit of input In farming for example theinitial effort of planting is more productive if followed by additionaleffort spent weeding so doubling labor time could more than doublethe resulting output Eventually however all such opportunities willbe exhausted and each additional hour of labor or unit of other inputbegins to offer ldquodecreasing returnsrdquo output continues to rise but at adecreasing rate Finally at very high levels of input use all opportuni-ties to do anything productive may be exhausted and additional inputsmight actually reduce output

On the particular curve drawn in Figure 5-4 the transition fromincreasing to decreasing returns occurs at the input level marked K


96

Beyond that point for each additional unit of labor the additions to out-put become smaller and smaller until eventually at point J additionsto output may stop entirely Beyond that point additional units couldactually reduce output so the curve begins to slope down

The input-response curve in Figure 5-4 shows the productivity ofone input when all the other inputs are held constant Changing thequantity of this one input perhaps labor results in a movement alongthe curve If other inputs were to change that would be shown as ashift in the curve We will see an example of such a shift later in thischapter

If two inputs are allowed to vary simultaneously the resultingproduction function can be illustrated as in Figure 5-5 with each curve(called an isoquant) representing a different level of output Curveshigher and to the right represent greater output levels than curves lowerand to the left For example point C represents a higher output level(200 units) than points A or B (100 units)

The isoquant that represents 100 units of output illustrates that thesame level of output (100 in this case) can be produced with different

Figure 5-4 A production function with one variable input


97

combinations of labor and capital (combination A versus combinationB) Thus if a country has abundant labor and little capital it might pro-duce using the combination of labor and capital represented by A If ithas abundant capital and little labor it might produce at B The isoquantthrough points A and B shows all the different combinations of laborand capital that can be used to produce 100 units of output It also tellsus how easy it is to substitute labor for capital in the production of thatoutput When isoquants are very curved inputs are not easily substi-tuted for each other Straighter isoquants imply easier substitution

Marginal Product and the Law of Diminishing ReturnsThe idea illustrated in Figure 54 that after some point adding addi-tional units of input tends to generate less and less additional output isknown as the law of diminishing returns Specifically the law says lsquoIn theproduction of any commodity as we add more units of one factor ofproduction to a fixed quantity of another factor (or factors) the addi-tions to total output with each subsequent unit of the variable factorwill eventually begin to diminishrdquo What is diminishing is the marginal

Figure 5-5 Production function with two variable inputs


98

output gain or marginal product of the factor (labor in Fig 5-4)2 As dis-cussed below the law of diminishing returns has important implica-tions for countries experiencing rapid population (and labor) growthwith a fixed natural resource base

A marginal product curve can be obtained (derived) from Figure5-4 by examining changes in total output for each successive unit of in-put The marginal product curve corresponding to the production func-tion in Figure 5-4 is shown in Figure 5-6 To the left of K the slope of theproduction function is increasing (Fig 5-4) thus the changes in outputare growing and the marginal product curve is rising (Fig 5-6) To theright of K the changes are smaller and marginal product curve falls Iftotal output eventually ceases to grow at all as more labor is appliedthe marginal product goes to zero this is point J on the productionfunction and on the marginal product curve Marginal productivity isimportant because it helps determine payments to factors of produc-tion such as wages paid to labor In addition the marginal productiv-ity of an input together with prices of outputs and inputs determinesthe demand for the input

Economic Optimality What Output and Input Levels Will

People ChooseAll points along a production function are equally possible to achieveBut are they equally likely to be chosen What factors might motivate afarmer to choose one point as opposed to another When people areasked what explains their choices they mention a variety of factors suchas input scarcity the need for output of particular products traditionsor habits and a desire to minimize risk Repeated studies have foundthat actual choices by large numbers of people over several years arebest explained by economic optimality Economic optimality means thatfarmers are rational and choose options that will give them the highestlevel of well-being attainable given the prices they face the availableresources and technology and their ability to absorb risk

Even in very low-income settings and across cultures farmers gen-erally attempt to optimize They may consider cultural and risk factorsas they optimize but economic well being plays an important role Be-cause farmers optimize they will generally choose to be somewherealong the production function and not below it For any given level of


2 The marginal product of an input is equal to the slope of the total product curve or∆Y∆X where ∆ represents a small change Therefore anything affecting this slopechanges the marginal product

99

Figure 5-6 Marginal product curve derived from the total product curve inFigure 5-4

input(s) they prefer to obtain as much output as they can attain In otherwords they prefer to be on the production function and not below itBut where along the total product curve would they prefer to producePrices help determine the answer Even for farmers whose productionis largely for home consumption some of their outputs and inputs aresold and purchased at prices set in markets off the farm When marketsset prices farmers can often reach the highest-possible level of well-being by maximizing profits subject to acceptable risk and then tradingthose profits for goods they want to consume

This kind of economic optimality typically leads to a single pointalong the production function as illustrated in Figure 5-7 In Figure 5-7 each level of profits can be represented by a straight line whose slopeis the price of the input divided by the price of output This ratio ofmarket prices is the rate at which the two goods could be exchanged inthe market In the left hand panel in Figure 5-7 the highest such linerepresenting the highest attainable level of profits occurs where theline touches the production function and their slopes are the sameMarginal revenue from the output equals the marginal cost of the input(MR=MC) On the right-hand panel in Figure 5-7 the profit line is the


100

ratio of the two input prices and also represents the total cost of pro-duction When farmers are producing on their production functionsand employing the correct amount of inputs to equate their marginalrevenue to their marginal cost of obtaining the last unit of output (theprice lines are tangent to the curves in Fig 5-7) they are said to haveachieved price or allocative efficiency This concept of efficiency can be animportant source of economic growth

SOURCES of ECONOMIC GROWTHWe can now use the production economics concepts described aboveto explore the possible sources of growth in an economy over time Oneof the major ways that economic growth can occur is through increasesin the amounts of inputs used in production While production func-tions usually refer to a particular type of output (say corn) one canthink of an aggregate production function relating total inputs to totaloutput or total national product Additional inputs can move a countryout of its aggregate production function to higher isoquants and higherlevels of output Therefore (1) population growth (which affects laboravailability and cost) (2) natural resource availability (which affects thecost of environmental factors such as land with its associated soils waterand forests) and (3) capital accumulation (which affects the availability

Figure 5-7 The economically optimal level of output and input choice


101

of man-made inputs) are three major elements in the development pro-cess These sources of growth cause movement along a given multi-factor production function

A second means of spurring economic growth is to change theway in which a country uses its factors of production increasing theamount of output produced by these inputs These output increasescan result from better organization of production or from shifts in theproduction function For example a new technology can shift the totalproduct curve upward so more output is produced per unit of inputs

BOX 5-1

SOURCES of GROWTH and the PRODUCTION FUNCTIONGrowth in output can occur either through a change in market opportuni-ties and relative prices which leads farmers to add inputs using existingtechnologies or because of an innovation that allows production of moreoutput at a given level of inputs

The left-hand panel below illustrates how profit-maximizing farmerswould respond to increasing abundance and hence lower relative price ofan input For example in poor countries when rural labor becomes moreabundant over time there is a decline in wages relative to other pricesleading farmers to apply more labor in land preparation weeding etc in aneffort to obtain more output

The right-hand panel shows how those same farmers might respondto a new invention such as better-performing seeds or veterinary medi-cine for their livestock Now the farmer can obtain more output at eachlevel of input This particular innovation was drawn so that the new profit-maximizing level of input use happens to be exactly the same as beforethanks to the innovation the farmer has gotten more output for no changein the input


102

There are three ways to get increased output per unit of input (1) in-creases in scale or specialization (2) increases in efficiency and (3) tech-nological change In many cases markets can change which in turnstimulates changes in these factors Movements along a given produc-tion function versus shifts in the function are illustrated in Box 5-1

A third means of stimulating economic growth is through increasedhuman capital as embodied in people (eg improved education andhealth) and improvements in social institutions (the rules of the game)Human capital can make labor more productive contributing to tech-nological progress and increased efficiency (especially when technolo-gies and markets are rapidly changing) Social institutions help defineproperty rights

Letrsquos examine more closely each of the sources of economic growth

The Demographic Factor Effects of Population Growth on

Agriculture and the EconomyFor most of history population growth was a major source of outputgrowth in the world People worked with primitive tools and morepeople meant more labor and output Crop and pasture areas expandedwith the rural workforce although output per person remained roughlythe same A greater population density also reduced the distance be-tween people and made it easier to develop cost-effective services suchas transportation communications schooling and so forth Popula-tion growth however is a mixed blessing because while there are moreproductive hands there are more mouths to feed As long as farmlandis plentiful land frontiers can be pushed back and growth continues inthe agricultural sector but in most areas of the world the best farm-land has been exhausted and rising numbers of farmers have no choicebut to invest more time in each field In this situation diminishing re-turns to labor cause farm incomes to fall unless farmers can turn to analternative source of growth

Population growth may also mean an increasing number of chil-dren relative to adults If the number of consumers is growing fasterthan the number of producers then the effect of population growth isalso more likely to be negative If population growth results from ex-tending the productive life of workers the odds of its effect being posi-tive improve


103

Natural Resources Environmental Influences on the

Location and Pace of DevelopmentNatural resources mdash including land and its associated soil water for-ests and minerals mdash have played an important role in economic devel-opment The extension of the frontier in the United States brought moreland and mineral resources into production and helped create wealthSimilar expansions have occurred in other countries Extensive use ofother types of natural resources has been important as well For ex-ample in the eighteenth and nineteenth centuries one of the most im-portant resources was coal as countries with large and easily-acces-sible coal deposits such as Britain used coal to fuel their local indus-trial revolution In the 20th century oil became important in some coun-tries Will natural resources continue to be an important source of eco-nomic growth or will they be a limitation to future growth

Some have argued that Earth is like a spaceship that its naturalresource capacity is finite There is only so much land and indeed wesee increasing problems with soil erosion deforestation and overgraz-ing Increased combustion of fossil fuels releases carbon into the atmo-sphere and depletes a finite supply of these resources Water resourcesare exploited to their fullest potential (or overexploited) in many places


Ecuadoran children

104

A plow and bullock can be a sizable investment in many developing countries

While technologies change and in essence create new resourcesthere is no question that land is limited and that the opening of newuninhabited fertile lands will be much less important to future eco-nomic growth in most countries than it has been historically It is alsoclear that many resources particularly forests and minerals are beingdepleted in many countries and are thus becoming less available tostimulate growth than they once were The real question for most coun-tries may not be whether exploitation of natural resources will be asignificant source of growth but whether natural resources will act as aconstraint to growth and what will be the cost involved in transitioningfrom one natural resource regime to another This issue is discussedfurther in Chapter 9

Accumulation of Physical CapitalPhysical capital may be defined as a countryrsquos stock of human-madecontributions to production consisting of such items as buildings fac-tories bridges paved roads dams machinery tools equipment andinventory of goods in stock Physical capital as we refer to it here meanshuman-made physical items and not money stocks and bonds etc Itrefers to private physical goods but also public investments in physicalinfrastructure

Capital accumulation is the process of adding to this stock of build-ings machinery tools bridges etc Another name for capital accu-mulation is investment Capital investment is important because it can


105

increase the amount of machinery and tools per worker thereby in-creasing the output or marginal product per worker A higher mar-ginal product per worker usually leads to a higher income per worker

Capital accumulation is also related to the possibilities of makingchanges in the scale of technology of production Furthermore the pro-cess of capital accumulation involves a choice between consumptiontoday and investing for future economic growth The choices of howmuch to invest and in what types of capital have important implica-tions for the rate and direction of economic development As will beargued throughout this text investment should be guided along anappropriate path by signals (prices) that reflect the true scarcity of re-sources

Technological ProgressIncreases in input levels (land labor and capital) accounted for mucheconomic growth prior to the nineteenth century However evidencesuggests that changes in the ways goods are produced have been theengine of modern economic growth for many if not most countries Thethree sources of growth mentioned above involve increasing inputs witha given production technology Economic growth can occur but onlythrough exploitation of natural resources and labor or accumulation ofcostly resources through savings and investment from year to year Moreimportant this type of growth is subject to diminishing returns asmovements along the production function generate smaller and smallerincrements of output for each additional unit of input Sustaining eco-nomic growth over time requires the constant invention of new tech-nologies to shift the production function and overcome diminishingreturns (see Box 5-1)

If technological progress allows the same or fewer resources toprovide more output the value of output per unit of resources risesand this rise can lead to increases in per-capita income Resources canalso be freed up to provide new types of goods The phenomenon oftechnological progress is not new and has been occurring for many yearsWhat is new is the rapidity with which new technologies are being de-veloped Modern technological progress is the result of both applied sci-ence and new knowledge in the basic sciences

SpecializationAs innovation occurs and capital is accumulated increasing opportu-nities arise for people to specialize and trade with each other Such spe-cialization and trade can raise productivity and attract savings and in-vestment Specialization is related to scale as well As firms increase in


106

size specialization is facilitated ldquoDivision of laborrdquo can make workersmore efficient as they become proficient at just a few tasks Adam Smithargued that this type of division of labor is at the heart of economicgrowth In his famous book The Wealth of Nations (1776) he noted thatspecialization is limited only by ldquothe extent of the marketrdquo or the easewith which one person can trade with others both within and acrosscountries As markets expand the possibilities of mass-producing goodsenable firms to gain efficiency in both production and marketing In-creased scale and specialization allow more output per unit of inputand hence growth

Efficiency ImprovementAnother type of organizational change that can lead to economic growthis improved production efficiency Improved efficiency means gettingmore for the same inputs

Efficiency can be divided into different types Technical efficiencyrelates to whether producers are producing on the production functionas opposed to below or inside it Using the same amount of inputssome producers obtain higher output levels than others due to differ-ences in management and effort Price or allocative efficiency mentionedabove and illustrated in Figure 5-7 relates to the degree to which pro-ducers operating on their production functions employ the correctamount of inputs to equate their marginal revenue to their marginalcost of obtaining the last unit of output By definition producers whomaximize profits are both technically and allocatively efficient

Market efficiency is related to the type of economic system and thedegree of market power within it Improvements in resource allocationoccur through market efficiency when increased competition or newtechnology lowers the margin between buyers and sellers A countrythat has a relatively free market with many buyers and sellers so thatno producer or consumer can affect prices has greater market efficiencythan one with a few producers who are able to control prices The avail-ability of good information affects the degree of market efficiency andimproved information flows can help create growth due to more effi-cient allocation of productive resources

Human CapitalSo far in this chapter we have explained economic growth without as-suming any change in the people themselves Much of economic growthis driven by changes in peoplersquos capabilities or their human capital asaffected particularly by their education and health The nature of these


107

capabilities is easily misunderstood Even the most illiterate impover-ished person is often intelligent and skilled but educated healthy peoplecan more easily contribute to the generation of new technologies andmore readily utilize those technologies Education is therefore an im-portant source of economic growth inextricably linked with techno-logical progress and of course with the productivity of labor Part ofthe economic benefits of education is derived from improved produc-tivity of workers part from improved quality of management and partfrom educationrsquos contribution to producing new or improved technolo-gies3 The term human capital is used in referring to education becauseeducation is an investment in many ways similar to physical capital inrequiring an investment of resources that pays off over a long period oftime and eventually depreciates

Education is important but in the lowest-income countries anequally important form of human capital is a personrsquos health Under-nutrition and preventable diseases remain the worldrsquos biggest killersand they sharply reduce the productivity of those who survive Im-provements in nutrition and disease control raise output directly andalso make it easier and more worthwhile to keep children in schoolleading to more education as well Human capital improvements dueto investments in health have also been called improvements in physi-ological capital4

Education and health are forms of human capital that are embod-ied in particular individuals If you were to trade places with a lower-income person the odds are you would be more educated and healthierand that might influence what you could do But if others in your soci-ety were also healthier and better educated that would allow you todevelop different expectations about their behavior as well You couldrely more on other people using your mutual education to developand communicate new ideas about how to work together

Institutional ChangeHistorical patterns of economic growth exhibit remarkable differencesacross countries and over time Levels and rates of growth differ sig-nificantly even among neighboring countries Many of these differencesare not solely attributable to sources mentioned above but to institu-tions as well Institutions include government policies legal structures


3 Education can of course have other benefits associated with the capacity to developnew institutions and with many non-economic factors

4 Robert Fogel National Bureau of Economic Research Working Paper 9771 June 2003

108

BOX 5-2

NEW TECHNOLOGIES INPUT USE and the DEMAND for

INNOVATIONTechnological innovations can have different impacts on a farmerrsquos inputuse and output levels and changes in resource availability can lead todifferent kinds of innovation The diagrams below illustrate how farmersrsquoprofit maximization affects their response to new technologies and affectsthe kinds of new techniques that are most needed in various countries

The left-hand panel shows an innovation that with no change in rela-tive prices would lead a farmer to increase input use The most importantexamples of such technologies are ldquogreen revolutionrdquo crop varieties whosegrowth habits and stress tolerance make it worthwhile for farmers to applymore labor fertilizer and water to the plant

The right-hand panel shows another kind of innovation that with nochange in relative prices would lead a farmer to cut back on input useMost such input-saving innovations are mechanical devices such as big-ger faster implements which take less capital and labor to do a given task

ldquoInput-usingrdquo innovations involve the discovery of new techniques tothe right of existing input levels whereas ldquoinput savingrdquo innovation involvesdiscovery of new techniques to the left of them Price changes by leadingfarmers to look for new techniques in one direction or the other help influ-ence which kind of innovation is more likely to be discovered and adoptedMost notably in poor countries where the farm labor force is rising labor-using innovations are demanded In contrast once the farm labor forcestarts falling in richer countries labor-saving mechanization is farmersrsquopriority


109

and market structures If markets exhibit distortions efficient price sig-nals will not be received by producers if financial markets are incom-plete or characterized by excessive risks savings and capital accumula-tion will be constrained If people are unsure about their ability to re-cover investments due to political instability or ill-defined propertyrights they will not undertake investments The ability of institutionsto adapt to new needs and demands can itself be a source of economicgrowth

During economic growth there is often explosive growth in manykinds of social institutions This new social capital may displace previ-ous institutions such as family or village networks which might havebeen helpful but are not as well-adapted to the new circumstances Someof these institutional changes are a result of economic growth but insome they may play a causal role in economic development so that atransfer of institutions could accelerate growth For example manycountries benefit from the introduction of quality certification systemsto enforce grades and standards uniform procedures for contract en-forcement and commercial law and well-adapted property rights ofvarious sorts

SUMMARYEconomic growth involves a transition from low-income agriculturalsocieties to higher-income non-farm employment The process is drivenby capital accumulation technological innovation and specializationin either sector An economic transformation occurs for several reasonsFirst demand for food is relatively fixed It is ldquoincome-inelasticrdquo so whenincomes grow demand for other things grows faster Second productiv-ity increases in agriculture free up resources for nonagricultural pro-duction Third as people specialize and trade with each other manytasks that were previously done on the farm are now classified as non-agricultural

Although agriculture declines as a share of the economy the sec-tor does not shrink Typically total farm output continues to rise dur-ing economic growth Furthermore when the total population is grow-ing the number of farmers tends to rise for many years until the abso-lute size of the non-farm sector is large enough to absorb all those en-tering the workforce each year The resulting change in land area perfarmer will often place downward pressure on rural living standardsduring the early stages of economic development even as the rest ofthe economy grows


110

To explain the causes and consequences of economic growth weuse production functions that describe for a given technology the dif-ferent amounts of product that can be obtained from different levelsand combinations of inputs An isoquant shows different combinationsof two inputs that can be used to produce the same level of outputgiven a particular technology The law of diminishing returns has im-portant implications as population or capital increases against a fixedland base To overcome diminishing returns and sustain growth overtime people need technological change increased specialization andtrade and improvements in efficiency that may be related to improve-ments in human capital and institutions

IMPORTANT TERMS and CONCEPTSCapital accumulation Law of diminishing returnsEconomic efficiency Marginal productEconomic transformation Natural resourcesEducation Non-farm job opportunitiesHuman capital Population growthInput demands Production functionInput response curve Scale and specializationInstitutional change Sources of economic growthIsoquant Technological progress

Looking AheadThe sources of growth discussed above relate to whole economies tosectors within economies and to individual firms (including farms)Various theories have been proposed to explain how the sources ofgrowth have been or could be combined to transform economies fromlow to higher standards of living We examine these theories in the nextchapter In subsequent chapters we consider how these growth factorscan affect firms within the agricultural sector

QUESTIONS for DISCUSSION1 What is meant by the term factors of production2 What are the three major factors of production and how do they

relate to the major sources of economic growth3 What is the law of diminishing returns and what might be its

significance in relation to population growth4 Will natural resource limitations be a serious restriction to future

economic growth or growth in food production5 What is capital accumulation and why is it important to

development


111

6 Why are specialization efficiency and technological progressimportant to agricultural and economic development

7 Why is an economic transformation inevitably associated witheconomic development

8 What factors determine the rate at which an economy becomestransformed from an agricultural to a mixed economy with signifi-cant nonagricultural as well as agricultural activities

9 If the total labor force were growing 2 percent per year and 50percent of the labor force were in agriculture how fast wouldnonagricultural employment need to expand in order to hold thenumber of people employed in agriculture constant Why is thisimportant

10 What are the implications of the economic transformation for theagricultural sector

11 What is meant by the terms human capital and institutionalchange

RECOMMENDED READINGSAnderson Kym ldquoOn Why Agriculture Declines with Economic

Growthrdquo Agricultural Economics vol 3 no 1 (October 1987) pp 195ndash207

Gardner BL ldquoCauses of Rural Economic Developmentrdquo in D Colmanand N Vink Reshaping Agriculturersquos Contributions to Society (OxfordUK Blackwell Publishing 2005) pp 21ndash41

Ruttan V Productivity Growth in World Agriculture Sources andConstraints Journal of Economic Perspectives vol 16 (Fall 2002) pp161ndash84

Thirlwall AP Growth and Development (New York Palgrave Macmillan2006) Chapters 4ndash6


112

CHAPTER 6

Development Theory and

Growth Strategies

We can realistically envision a world without extreme poverty by the

year 2025 because technological progress enables us to meet ba-

sic human needs on a global scale mdash Jeffrey Sachs1

People respond to incentives all the rest is commentarymdash Steven Landsburg2

THIS CHAPTER1 Reviews how economic development and growth theories have

evolved over time including the role of institutions2 Considers the interaction of technology and institutions3 Considers the distinctive characteristics of agriculture as opposed

to other sectors as the economy develops

The HISTORICAL EVOLUTION of DEVELOPMENT THEORYIn the previous chapter we identified potential sources of economicgrowth and the inevitable structural transformation that accompanieseconomic development We turn now to ideas and theories that attemptto explain how these sources of growth can be integrated into transfor-mation processes that produce higher living standards The search forappropriate theories of economic development has received economistsrsquoattention for two centuries Different theories have led to different im-plications for what governments private firms or individuals mightdo to achieve their goals One especially important contrast concerns

1 Jeffrey Sachs The End of Poverty Economic Possibilities for Our Time (New York Pen-guin 2005) p 347

2 Steven Lansburg The Armchair Economist Economics and Everyday Life (New YorkFree Press 1995)

113

the relative roles attributed to technology and productivity (reflectedin the quotation above from Jeffrey Sachs) as opposed to institutionsand incentives (reflected in the quotation above from Steven Landsburg)Emphasis has shifted over time partly because of changes in constraintsthat limit economic growth partly because of changing technologicalpossibilities and partly because of experiences with what has or hasnot worked We consider in this chapter the historical progression ofthinking among economists Over time a synthesis of ideas has emergedwith increased focus on the interaction between technology and insti-tutions

The Classical PeriodThe late eighteenth century is known as the classical period in economicthought and the books written then remain widely debated today One ofthe most enduring debates concerns the role of international trade At thetime conventional wisdom held that a countryrsquos wealth like the wealth ofan individual could be measured by the amount of its gold and othermonetary assets Exports were believed to be better than imports and thismercantilist view provided an important argument for trade restrictions inBritain and elsewhere Adam Smith challenged the mercantilist idea ar-guing that freer trade in both directions would produce higher standardsof living especially if combined with a more competitive equal-opportu-nity environment at home Adam Smithrsquos arguments were extended byJohn Stuart Mill and David Ricardo and their ideas about the division oflabor and specialization comparative advantage and trade remain keyconcepts in modern economics Their theories about the value of freer tradewere not easily accepted at the time however and many mercantilist ideasremain widespread today

The eighteenth century was a period of both economic expansionand population growth Many political leaders argued that having morepeople would help make each country richer In the early nineteenthcentury this idea was challenged by Thomas Malthus who argued thatpopulation was limited mainly by the food supply and by a fixed sup-ply of high-quality land Ricardo agreed with Malthus and was pessi-mistic that growth could be sustained in the long run in a country be-cause of the implications of population growth given the law of dimin-ishing returns Their classical theory in its simplest form proceeds asfollows (1) There are two broad types of people workers whose onlyasset is their labor and capitalists who own land and capital With acertain amount of labor just enough wages are paid to cover workersrsquosubsistence (2) If a new invention or some other favorable event cre-ates an increase in production a surplus above that necessary to pay


114


the subsistence wage is generated which is accumulated by capitalists(3) Such accumulation increases the demand for labor and with a givenpopulation in the short run wages tend to rise (4) As wages exceed thelevel of subsistence population grows generating an increased demandfor food (5) But if high quality land is essentially fixed the rise in fooddemand is met by bringing lower-quality land into production Theprice of food rises to cover the higher cost of production on lower-qual-ity land (6) The effects of increased population (supply of labor) andhigher-priced food drive the real wage or the wage paid divided byfood prices back to the subsistence level and the rate of populationgrowth declines

Thus in the classical model diminishing returns to increments oflabor applied to a relatively fixed supply of high-quality land and highercosts of production on lower-quality land represent constraints togrowth so that living standards remain at subsistence levels If techno-logical progress occurs the situation may change temporarily but notpermanently Ricardorsquos policy prescription was for Great Britain toremove its corn laws which would free up trade and allow foodimports to keep the price of food from rising and choking off indus-trial growth

History has shown that the classical model underestimates the roleof technological progress It also fails to consider factors that tend tolower birth rates as economic growth occurs It oversimplifies the forcesinfluencing wages and the complexity of the sharing or distributionobjective found in many societies Nevertheless as we will see belowcertain aspects of the classical model had a significant influence on sub-sequent theories of economic development especially its emphasis ondiminishing returns and its implications for trade

Growth Stages From Marx to RostowBy the late nineteenth century there had been enough economic devel-opment in Europe and North America for observers to notice a clearshift in the mix of activities Many economists focused on patterns ofsuch change arguing that economies moved through sequential growthstages While the suggested sets of stages were based on different prin-ciples most growth stage theories attempted to emphasize that eco-nomic development involves a structural (economic andor social)transformation of a country

In the late nineteenth century Frederick List a German economichistorian developed a set of stages based on shifts in occupationaldistribution His five stages were savage pastoralism agriculture

115

agriculture-manufacturing and agriculture-manufacturing-commerceConcurrently another German Karl Marx visualized five stages ofdevelopment based on changes in technology property rights and ide-ology His steps were primitive communism ancient slavery medievalfeudalism industrial capitalism socialism and communism He feltthat class struggles drive countries through these stages One class pos-sesses the land capital and authority over labor while the other pos-sesses only labor Class struggles occur because economic institutionsallow the exploitation of labor Prior to reaching the final stage labor isnever paid its full value For example if wages rise in the fourth stage(industrial capitalism) labor is replaced by machines thereby creatinga ldquoreserve army of the unemployedrdquo that brings wages back downBecause capitalists derive their profits from labor more machines andfewer laborers mean lower profit rates The pressure of lower profitsleads to more exploitation more unemployment mass misery and even-tually revolution Labor then gains control over all means of produc-tion under communism

A different kind of thinking about growth stages emerged in theearly twentieth century when Alan Fisher and later Colin Clark de-veloped a theory in which the transition from agriculture to manufac-turing and services occurs not because of government intervention butbecause of increases in output per worker and advances in science andtechnology Another growth stage theorist Walt W Rostow argued inthe 1950s that these changes were closely related to the rate of growthin per-capita incomes which would experience a ldquotake offrdquo into sus-tained growth once enough capital had been accumulated Rostow be-lieved however that an eventual slowdown in the rate of growth wouldbe the normal path for any sub-sector in an economy due to decliningprice and income elasticities of demand for the goods produced by asector In this view the secret to growth is to find and support emerg-ing or ldquoleading sectorsrdquo

Thinking of the economy in terms of distinct sectors has some ad-vantages but the idea of distinct growth stages fell out of favor in the1950s Countries experienced a wide variety of growth paths duringthe 1950s and 1960s and some experienced sharp reversals of fortuneMost economists no longer thought of economic growth as a predeter-mined sequence of stages which had relatively little prescriptive powerbut instead focused on the gradual accumulation of productive re-sources particularly capital


116


Capital Accumulation From the ldquoFinancing Gaprdquo to

Technology-Driven GrowthThe first widely-used theory of growth based on capital accumulationwas developed by Roy Harrod and Evsey Domar They used math-ematical formulas to show how the rate of output growth would belimited by the level of investment and hence the national savings ratemultiplied by the productivity of those investments The Harrod-Domarmodel was simple and elegant and yet could still be fitted to real datausing the observed capitaloutput ratio of the economy to project theproductivity of additional investment

In the 1960s when the Harrod-Domar approach was applied tolow-income countries it was recognized that national savings was notthe only possible source of capital Borrowing from abroad could addto national savings permitting an even faster growth of the capital stockSuch ldquotwo-gaprdquo models popularized by Hollis Chenery and othersimplied that foreign aid to fill a ldquofinancing gaprdquo could accelerate growthsignificantly as each dollar of aid would have the same productivity asa dollar of savings

The Harrod-Domar-Chenery approach focused primarily on therate of national savings or borrowing from abroad with less attentionto the efficiency with which additional funds were spent In the mid-1950s Robert Solow worked out the mathematics of a model in whichadditional capital earns diminishing returns In that case the long-runrate of growth of per-capita income is driven by the rate of technologi-cal progress not savings as such Solow did not explain how techno-logical progress is generated he treated new technology (and hence thegrowth rate of the economy) as exogenous to (outside of) his modelMuch later a new generation of economists would make growth mod-els in which people choose how much to invest in new technologies sothat technical change and hence the growth rate is endogenous ex-plained by property rights and government policies Those models aredescribed in the final section of this chapter

Dual-Economy Models ldquoSurplus Laborrdquo and

UnemploymentThe first mathematical models of growth used a single sector to de-scribe the whole economy and focused on capital accumulation Soonthereafter economists produced models with two sectors in whichgrowth and poverty alleviation depend crucially on the allocation oflabor The most influential dual-economy (or two-sector) model was de-veloped by W Arthur Lewis His model was subsequently modifiedby John Fei and Gustav Ranis Dale Jorgenson and others

117

A simplified version of the dual-economy model can be illustratedusing the total and marginal product curves shown in Figure 6-1 Thisversion of the model is designed to relate most closely to the situationin large labor-surplus but relatively natural-resource-poor countries inwhich domestic (as opposed to international) characteristics of theeconomy dominate The model could potentially represent (albeitroughly) the situation in a country such as India or China

The model includes several sources of growth discussed in Chap-ter 5 and illustrates the potential for using ldquosurplusrdquo labor and techno-logical progress in agriculture to achieve economic growth It assumesthe existence of a large population in the traditional agricultural sectorfor which the marginal product of labor is below the wage rate whichis determined by societyrsquos rules about sharing output There is disguisedunemployment in the sense that if the people who appear to be work-ing are removed production will not drop or will drop very little Inother words labor is applied in the agricultural sector up to the pointwhere it is redundant in the upper left-hand graph in Figure 6-1 or tothe right of N3 or N2 in the lower left-hand graph

Figure 6-1 Graphical representation of labor-surplus dual-economy model


118


The wage rate in agriculture (W) is assumed to initially approxi-mate the average productivity of labor in that sector (and eventu-ally be determined in an inter-sector labor market) Land is fixed Wagesin the modern industrial sector are assumed to be higher than in theagricultural sector in order to attract labor from the agricultural sectorFirms in the modern sector hire labor up to the point at which the mar-ginal product of labor equals the wage rate Initially this is the point Poin the lower right-hand graph of Figure 6-1 Labor in industry is hiredup to Lo at the wage P

In a ldquolabor surplusrdquo economy the development process can bedriven by transfer of labor from agriculture to the industrial sectorwhere it creates a profit that can be used for further economic growthIn the lower right-hand graph in Figure 6-1 total wages initially paid tolabor in the industrial sector equal the area PPoLoO while profits equalthe triangular area QP0P This profit or part of it is reinvested in capi-tal items such as equipment machinery and buildings mdash items thatmake labor more productive This greater productivity shifts the totalproduct of labor in industry upward (see the upper right-hand graphof Figure 6-1) and the corresponding marginal product of labor (de-mand for labor) out to the right (see the lower right-hand graph of Fig-ure 6-1) This demand for labor is met by drawing more labor out ofagriculture

In the model a shift of labor from agriculture to industry contin-ues to drive economic growth as long as the marginal cost of labor re-mains constant (represented by the horizontal line between Po and P2in the lower right-hand graph in Fig 6-1) Once the supply of ldquosurplusrdquolabor from the traditional farm sector has been absorbed the marginalcost of labor supplied to the modern sector turns upward (as it does tothe right of L2) the growth in demand for labor by industry slowsbecause fewer profits are available for reinvestment

Why might the wage rate in industry increase and the demand forlabor stop shifting out First surplus labor in agriculture might be usedup so industry would have to offer higher wages to compete with agri-culture for labor Second food production will start to decline if fewerthan N2 workers are employed in the agricultural sector If populationis increasing and incomes in the industrial sector are rising then thedemand for food will rise Unless an increase in agricultural produc-tion occurs agricultural prices eventually rise relative to industrialprices This rise in turn raises the wage at which employers are able toobtain workers from agriculture for industry The major implication isthat economic growth becomes constrained unless there is technologi-cal improvement in both sectors

119

The labor-surplus dual-economy model is a highly simplified viewof the situation in countries with underemployed people It has severallimitations First evidence indicates that few if any situations exist wherethe marginal product of labor in agriculture is close to zero Few coun-tries have excess labor in agriculture However Jorgenson and othershave pointed out that the presence of an active labor market in whichthe two sectors compete for labor can generate the same implication ofthe need for technological improvement in both sectors Second themodel ignores the possibility of international trade although it couldbe added without much difficulty Third and more important the modelfails to recognize the cost of resources used in conducting research andeducating farmers to produce more and facilitate adoption of new tech-nologies The issue of how to endogenize (build in the process for selfgenerating) the development of new technologies in a model of eco-nomic development was not addressed Despite these limitations it isa useful means of thinking about linkages between multiple economicsectors in a developing-country context

Dependency Theory and Trade ProtectionismIn the 1950s and 1960s a number of theorists saw international tradeand investment as a cause rather than a remedy for poverty in low-income regions arguing that trade made the poor increasingly depen-dent and weak Immanuel Wallerstein for example popularized theidea that prosperity of the ldquocenterrdquo was linked to the impoverishmentof the ldquoperipheryrdquo Dependency theory encompassed a range of argu-ments generally leading to the conclusion that the governments of low-income countries should protect their local economies from foreign tradeand investment pursuing self-sufficiency as a form of political and eco-nomic independence

A few dependency theorists notably Andre Gunder Frank

adopted a Marxist perspective arguing that the income of wealthy coun-tries was derived from the output of poor countries In this view wealthycountries use military and political power to limit poor countriesrsquo op-tions and thereby extract income that would otherwise belong to thepoor Some expropriation of this type clearly has occurred in the colo-nial period and through other kinds of intervention but most economichistorians believe the output of poor countries can explain only a verysmall fraction of the wealth we see in industrialized countries

A more widely-accepted set of ideas come from structuralists suchas Raul Prebish and Hans Singer who argued that market forces limitthe degree to which poor countries can develop through trade withricher countries In this view the terms of trade (the ratio of prices of


120


exports to prices of imports) tend to turn against developing countriesover time because they produce mainly primary products (agriculturaland mineral) for which prices decline over time relative to the manu-factured products they import This deterioration in the terms of trade isbelieved to be generated by (1) low price and income elasticities of de-mand for primary products compared to manufactured products (2)slow productivity growth in primary product production and (3) mo-nopolistic elements in the production of products imported by devel-oping countries while primary products are produced competitivelyTo the extent that demand for poor countriesrsquo exports is price- and in-come-inelastic then output expansion in the poor countries or in theworld as a whole does indeed worsen poor countriesrsquo terms of tradealthough again this influence can explain only a fraction of the incomegap between rich and poor countries

The trade restrictions favored by dependency theorists could alsobe justified by much older arguments in favor of government interven-tion to protect domestic markets from foreign competitors notably theidea that infant industries can get started only if they are temporarilyprotected from foreign competition and the idea that a big push to ex-pand many industries simultaneously could help countries take advan-tage of synergies between them During the 1970s and 1980s howeverit became increasingly clear that industrialization aimed at replacingimports for the domestic market could generate only a temporary burstof economic growth Export-oriented industrialization proved to bemore successful

Contemporary Growth Theory Technological Innovation

and Public InstitutionsBy the mid-1980s enough statistics on national income across coun-tries were available for researchers to test the basic predictions of thestandard growth model posited thirty years earlier by Robert SolowResults were surprising and sparked a burst of academic research oneconomic growth and poverty reduction that continues today

The Solow model predicted that poor countries would eventuallycatch up to rich ones because of diminishing returns to capital Statisti-cal tests showed that this type of ldquoconvergencerdquo did indeed occur butonly among sub-groups of countries The highest-income group of coun-tries continued to grow with no sign of diminishing returns while somepoorer countries grew even faster to catch up and other poor countriesjust stayed poor

Economic theorists attempted to explain these results RobertLucas Paul Romer and others showed how rich countriesrsquo growth could

121

be explained by a flow of new technologies which help overcome di-minishing returns Their models hinge on the idea that new knowledgeis a public good once discovered it can be used repeatedly in newtechnologies without being used up and so technological innovationscan accumulate without limit But not all countries are able to generateor use these innovations

What determines whether a country develops and applies appro-priate new techniques Knowledge itself is a public good whose de-velopment and dissemination depends on public education and gov-ernment-funded research Individuals and private firms will never haveenough incentive to invest as much in these resources as they are worthto society as a whole But knowledge is economically valuable onlywhen embodied in goods and services that meet consumer needs Suc-cessful countries promote both public knowledge and also private enter-prise encouraging new enterprises with new technologies

A key question is the degree to which innovators should be givenmonopoly rights over the sale of new products through patents andother forms of intellectual property rights Government-enforced pro-tection from imitators is a double-edged sword it makes each inven-tion more profitable than it otherwise would be but it does so by re-stricting its use The patent policies that are most economically suc-cessful limit the scope and duration of protection to be just enough toreward past innovators while encouraging others to make use of theinnovation The British and US patent systems were early pioneers inthis regard offering protection only to a specific product (to allow theentry of other somewhat similar products) and limiting the time pe-riod of protection (to hasten the entry of other firms) while allowingcompetitors to challenge othersrsquo patents in a free and fair judicial sys-tem

The interplay among technology natural resources human capi-tal and institutions remains an active area of research today It is clearthat other sources of growth are only effective if they operate in aninstitutional environment conducive to growth The importance of therule of law enforceable property rights and contracts absence of seri-ous government distortions to markets and relatively low levels of cor-ruption are all important to economic development The high costs oftransacting also seem to prevent many countries from realizing im-proved levels of living Improved information flows may help re-duce the cost of transacting and make it more difficult for inefficientinstitutional and political structures to survive We return to this issueof how to reduce transactions costs in Chapter 11


122


FROM THEORY to ALTERNATIVE STRATEGIESThe concept of a development strategy implies a long-term road map thatencompasses a series of fundamental decisions with respect to sectoremphasis (agriculture versus industry) factor use (capital-led versusemployment-led growth) international market orientation (inwardversus outward) concern for growth versus distribution and the rolesof the private versus the public sector Many of these decisions presentconflicting choices that countries must make when designing their de-velopment strategies The appropriate path for a particular countrydepends on its starting characteristics and global economic conditions

Industry versus AgricultureThe question of whether to channel public and private investments intothe agricultural or industrial sectors has been asked by policymakersfor many decades In most countries agriculture is initially the domi-nant sector containing most of societyrsquos resources but it contains thepoorest and least politically influential people and so is often relativelyneglected by government Investments in agriculture are slowed by thisweak political base but other factors inhibit such investments Impactsof agricultural productivity growth can be difficult to observe As seenin Chapter 5 an increase in farm output generally leads to an increasein other activity as farmers invest their resources in non-farm enter-prises and a lower cost of food helps non-farmers buy more of otherthings So agriculture appears to be a slow-growth sector even as itdrives the expansion of other sectors Politicians generally want to pleaseurban constituents and often adopt policies to lower food prices Lowerfood prices in turn reduce the profitability of investments in agricul-ture There is usually much stronger political pressure for urban in-vestments and for policies that produce immediate highly visibleresults

The degree to which governments support agriculture as opposedto industry also depends on world market conditions in the late 1960sand early 1970s the threat of food scarcity associated with Asian popu-lation growth led many countries to invest heavily in irrigation andcrop breeding to raise agricultural productivity especially within AsiaDuring the 1980s and 1990s the payoff from those investments pro-duced a relative abundance of food on world markets which reduceddemand for further investment even in regions such as Africa wherefood was increasingly scarce During the current decade agriculturalmarkets have tightened again due in part to those lower investmentsin agriculture in the 1980s and 1990s and in part due to growth in use

123

of agricultural products for bio-fuels The resulting higher prices forfood once again appear to be stimulating some public investments inagriculture In addition private companies and private foundations suchas the Gates Foundation have responded with increased investments inagriculture

Inward- versus Outward-Led GrowthA persistent debate in the development literature has centered on themerits of an inward (import-substitution self-sufficiency)ndashorientedstrategy versus an outward (international trade export promotion)ndashoriented strategy Some observers have argued that developing coun-tries are hurt by trade because they produce mainly primary productsfor which prices decline over time relative to the manufactured prod-ucts they import In addition the colonial heritage in several develop-ing countries included the export of certain primary products to devel-oped countries with the profits going to foreign companies or to smallgroups of elites in the developing countries Proponents of an inwardstrategy have also argued that countries following an inward-orientedpath suffer less from debt crises and protectionist policies in the devel-oped countries

The impact of inward-directed strategies depends largely on thepolicies used to implement the strategy Policies such as overvaluedexchange rates import restrictions and explicit export taxes which dis-courage exports and stimulate substitution of domestically producedgoods for imports have generally been shown to be counterproduc-tive They lead to distortions in resource prices create monopoly prof-its high government budget deficits and usually inflationary pres-sures Policies supporting production of foods for internal consump-tion via research infrastructure and other public investments can becalled inward-oriented yet are not associated with some of the distor-tions caused by measures typically used to promote import-substitu-tion

Proponents of outward strategies argue that by removing the biasagainst exports countries can achieve significant economic benefits fromspecialization and comparative advantage from the import of productsmanufactured by highly capital-intensive industries abroad and fromthe stimulus to employment provided by reduced pressures to con-centrate capital in a limited number of capital-intensive industriesEconomies of scale can be achieved due to enlargement of the effectivemarket size Some countries that have been successful at promotingexport-led growth have in fact also relied on government interven-tions in exporting industries


124


Theoretical arguments support either position However over thepast 30 years empirical evidence is weighted in favor of an outward-looking strategy that biases the economy neither for nor against ex-ports Evidence shows that policies often used to create an inward-look-ing strategy can lead to inefficiency The economic efficiencies sacri-ficed in attempts to insulate a country from world market forces can besignificant Open markets expose a country to the effects of protection-ist policies and interest rate fluctuations abroad However they alsooffer insurance against risks originating at home

Outward-looking strategies will be most successful if internationalmarkets are truly competitive and if access to markets is unrestrictedInternational trade agreements covered later in this book have movedthe world markets toward more transparency and fewer trade restric-tions Many restrictions however still exist

Growth versus EquityThe persistence of abject poverty even in countries experiencing rapidrates of economic growth has spurred a debate over the appropriatefocus of development efforts Most of us accept the goal of lifting asmany people as possible out of extreme poverty but there are manycompeting ideas on how to do it Essentially three general approacheshave been suggested sometimes in combination The first is to makedirect transfer payments (money goods services) from the more well-to-do to the poor The second is for the country to concentrate entirely

Many developing countries have a comparative advantage in exportingsugar but face protectionist sugar policies in developed countries

125

on growth as a goal no matter who receives the income in the expecta-tion that part of the benefits will trickle down to the poor A third ap-proach is to direct specific efforts toward raising the productivity of thepoorest segments of society during the growth process

Direct transfer payments are difficult for developing countries toafford unless obtained as grants from international sources The mostimportant role of direct transfers can occur (1) during short-run weather-induced famines unusually high food price spikes or other emergencysituations and (2) among the perpetually disadvantaged elderly or-phaned and handicapped

The majority of the poor in most developing countries howeverare the unemployed and underemployed rural landless Even unskilledurban workers are usually better off than the rural landless The land-less live close to the margin and may fall below it during bad crop yearsTherefore the important question is whether the benefits of growth willtrickle down to the poor or whether development efforts must be di-rected at the poor

During rapid growth some benefits are captured by the poorHowever the income distribution often will worsen (become more un-equal) during initial stages of growth unless specific efforts are directedtoward incorporating the poor into productive activities The poor canbe bypassed by growth-oriented investments especially when posses-sion of assets particularly land and education is skewed Countriesthat begin with a more equal distribution of assets tend to experiencegrowth with equity more than others Growth can actually stagnateunder conditions of extremely inequitable asset distribution Growthitself can be affected by the wider spread of assets institutional changesand employment-creating activities

The mere widening of the income distribution as developmentoccurs is not as much a concern as what happens to income levels of thepoor Neither the level nor the distribution of income will be improvedfor the poor in most countries unless they have improved access to as-sets such as land and education which can make their primary assetlabor more productive during the growth process Development strat-egies that increase employment opportunities and promote the supplyof wage goods (mainly food) will have the best chances for reducingpoverty under virtually all circumstances

Private versus PublicThe appropriate mix of public and private activity varies by countryand by sector Some services are almost always best funded throughthe public sector such as an independent judicial system and roads


126


These are public goods whose provision is limited by free rider prob-lems people can benefit without paying so government interventionis needed to force everyone to pay a share of their costs Other activitiescan be funded voluntarily through private activity but must be regu-lated by the public sector or they will be provided inefficiently

Activities that are typically regulated by government if not pro-vided directly in the public sector include natural monopolies such aswater supplies or services with positive externalities such as sanitationand health Too little of these services would be provided by privatefirms if they were not regulated in some way by government On theother hand unregulated firms would provide too many goods that gen-erate negative externalities such as pollution

The outcome of interactions between the public and private sec-tors is often determined not by who does what but by the degree oftransparency and accountability in what they do Private firms that canbe held accountable to their investors and customers tend to work effi-ciently as do public institutions that are accountable to voters and tax-payers Either kind of institution can become corrupt and inefficient inthe absence of appropriate checks and balances within and betweeneach sector

A useful way to explain the degree of accountability in theeconomy over both public and private institutions is through the rela-tive size of transaction costs in the market or political system Lowertransaction costs typically make either system more accountable to alarger number of people Easier transactions between customers andsuppliers make the market more efficient and easier transactions be-tween citizens and their government usually make the public sectormore efficient

A range of institutional arrangements can keep transactions costslow and sustain checks and balances over time Private markets mustbe regulated by public institutions and the public sector must be keptaccountable to the private individuals Otherwise even if new tech-nologies are available growth can be hindered by an inefficient or in-equitable institutional structure

Many examples of insufficient institutional structures exist in theworld In developing countries these inefficient or insufficient institu-tions constrain economic growth continually and contribute to short-term economic crises In developed countries they also can cause peri-odic problems such as the recent financial crisis that was facilitated bylax financial regulations with limited oversight Achieving the appro-priate balance of institutional efficiency and accountability is difficultbut critical for economic development

127

SUMMARYThe classical model of economic growth stressed the importance of di-minishing returns to labor as a constraint to growth and the mid-twen-tieth-century Solow model stressed diminishing returns to capital Con-temporary experience however shows how countries with institutionsthat reward innovation can sustain rapid economic growth far beyondthese constraints

Growth-stage theories attempted to categorize the growth processinto successive stages through which countries must pass as they de-velop Dual-economy models focused on movement of labor out of ag-riculture and how the agricultural transformation can be smoothed bybalanced growth in both sectors Dependency theorists argued thatdeveloping countries became increasingly exploited as they becomemore integrated into world markets and so should withdraw into self-sufficiency Each of these classes of theories provides some insights intothe development process but does not provide a comprehensive theoryof growth and development

Contemporary development strategies recognize the role of agri-culture as an engine of economic growth Agricultural growth frees uplabor and other resources that can be used in other sectors It helpsalleviate poverty by improving food availability and stimulating broad-based employment growth Most economists agree that internationaltrade should be kept relatively open and that governments should pro-vide public goods promote innovation regulate monopolies and makemarkets more efficient The exact development strategy for each coun-try depends on its resource mix stage of development and institutionalstructure New institutional arrangements will have to be designed inmany countries to enhance information flows and lower transactionscosts to make markets more efficient and promote accountability inthe public and private sectors

IMPORTANT TERMS and CONCEPTSAccountability lmport substitutionCapital-led growth Income distributionCenter and periphery Institutional arrangementsClassical model Integrated rural developmentComparative advantage Labor-surplus dual-economyDependency theory Open versus closed economyEmployment-led growth Public goodExport-led growth Stage of developmentGrowth stage theory Terms of tradeGrowth versus equity Transactions costsHarrod-Domar model


128

Looking AheadIn this chapter the roles of agriculture in economic development werementioned along with the need for countries to have development strat-egies In much of the rest of the book we will be examining how todevelop the agricultural sector itself Before we do that however it isimportant to discuss the nature of existing agricultural systems in de-veloping countries In the next chapter we discuss the characteristicsof traditional agriculture and agricultural systems

QUESTIONS for DISCUSSION1 What is the major factor that is hypothesized to constrain economic

growth in the classical model2 What are the major features of the labor-surplus dual-economy

model and what are its primary weaknesses3 Why might the wage rate eventually increase in the industrial

sector in the labor-surplus dual-economy model4 What implications does technological change in the agricultural

sector have in the labor-surplus dual-economy model5 What is the distinguishing feature of dependency theories What

are the policy implications of dependency theories6 Why is agricultural development important in most developing

countries7 What is employment-led growth and why is employment impor-

tant to development8 What are the arguments for and against inwardversus outward-

oriented development strategies9 What are the three general approaches that have been suggested

for alleviating abject poverty10 Why might both the private and public sectors have important

roles to play in development

RECOMMENDED READINGSHayami Yujiro and Vernon W Ruttan Agricultural Development An

International Perspective (Baltimore Johns Hopkins University Press1985) Chapter 2

North Douglas ldquoInstitutions Transactions Costs and EconomicGrowth Economic Inquiry vol 25 1987 pp 415ndash8

Olson Mancur Jr ldquoBig Bills Left on the Sidewalk Why Some NationsAre Rich and Others Are Poorrdquo Journal of Economic Perspectives vol10 Spring 1996 pp 3ndash24


129

PART 3

Agricultural Systems

and Resource Use

Traditional farm in Nepal

130

PAPART 3 mdash AGRICULTURAL SYSTEMS AND RESOURCE USE

131

CHAPTER 7

Agriculture

in Traditional SocietiesIn low-income countries peasant agriculture tends to be character-

ized by low levels of utilization of certain resources low levels of pro-

ductivity and relatively high levels of efficiency in combining resources

and enterprises mdash John W Mellor1

This Chapter1 Describes the common characteristics of traditional agriculture2 Discusses how traditional farms make decisions about their

livelihoods3 Discusses implications of characteristics of traditional farming

systems for agricultural development

CHARACTERISTICS of TRADITIONAL AGRICULTUREThe world food-hunger-poverty problem is serious and solutions de-pend in part on agricultural development Before considering how tofoster development one needs knowledge of the nature of agriculturein developing countries Without this knowledge it is difficult to un-derstand the steps needed to stimulate agricultural development andhow these changes will affect the people involved In this chapter weexamine several general characteristics of traditional agriculture Thenin Chapter 8 we compare specific types of agricultural systems in vari-ous stages of development2

The term traditional agriculture conveys part of its own meaningThe word ldquotraditionalrdquo means ldquoto do things the way they have usually

1 John W Mellor Economics of Agricultural Development (Ithaca NY Cornell Univer-sity Press 1966) p 134

2 Agricultural systems include production practices or how things are produced aswell as the types of enterprises or what things are produced

132


been donerdquo Because natural resources culture history and other fac-tors vary from place to place the way things have usually been donealso differs greatly from one location to another And because condi-tions change no type of farming system no matter how traditional isever completely stable In fact one of the major challenges to agricul-tural development is to stimulate improvements in production prac-tices and introduce higher value products to raise incomes over timeTo do so we need to understand the common characteristics found intraditional agriculture

Livelihoods and the Intermixing of Farm and Family

DecisionsTraditional agriculture takes several forms but small farms predomi-nate in most developing countries Farm families have access to manytypes of assets including human labor land physical capital such asequipment financial capital natural assets and social and political as-sets Farmers make decisions about how to use their assets in produc-tion labor supply consumption and other activities and these deci-sions reflect their ldquolivelihood strategiesrdquo Production and consumptiondecisions are generally intermixed on traditional farms For examplein remote areas in Bolivia farmers produce a number of potato variet-ies some for sale However some varieties are needed for families andguests during festivals these varieties are often not available in localmarkets The cultural requirement that such varieties should be avail-able at these times affects household planting decisions The impor-tance of the family and the close relationship between production andconsumption decisions occur because much of the labor managementand capital come from the same household A sizable proportion of theproduction is consumed on the farm or at least in the community whereit is produced Success in the farm enterprise may enhance nutritionalstatus which can in turn lead to higher productivity

Labor and Land UseTraditional farms generally are very small usually only 1 to 3 hectares(about 25 to 75 acres) Labor applied per hectare planted howevertends to be high In many areas land is a limiting factor and is becom-ing more limiting over time as populations continue to grow Labor isoften underemployed at certain times of the year while capital assetsare fully exploited Much sharing of work and income occurs on tradi-tional farms so there is little open unemployment during slack timesThis sharing means that the individualrsquos wage may be determined bythe average rather than the marginal productivity of labor as mentioned

133


BOX 7-1

KEFA VILLAGE in EASTERN ZAMBIAThe anthropologist Else Skjonsberg visited Kefa Village first in 1977 and

several times since Her book Change in an African Village Kefa Speaks

portrays a traditional agricultural system in Eastern Africa Villagers in Kefa

depend on land which is controlled and allocated by the local chief Some

inherit cultivation rights from their parents others request unused land from

the chief and others borrow land from relatives and neighbors When land

shortages arise groups of villagers break away and search other areas for

unused lands

Households cultivate 1-4 hectares with maize groundnuts sweet

potatoes and pumpkins produced for own consumption and tobacco and

cotton produced for sale Fortunate farmers have access to wetland

dambos where they grow vegetables year-round The agricultural year

starts before the first rains in October when the ground is broken by hand

hoes Maize the most important food crop is planted first weeded first

and harvested first Most villagers plant open-pollinated maize varieties

which have been used for generations Maize is stored in granaries and in

years of abundance it is used to brew beer or sell Groundnuts are rotated

with maize to maintain soil fertility and provide dietary protein Hybrid maize

varieties with higher yields and shorter growing seasons have been intro-

duced but most Kefa villagers are suspicious of their quality and only pro-

duce them for sale Hybrids require purchased fertilizer and in dryland

farming exposure to risk invites trouble Many believe use of fertilizers will

breed dependency and bring ruin to adventurous farmers

Family members share work responsibilities Women prepare meals

carry them to the fields hand-cultivate all day then return home with pots

and pans loads of firewood and water During December and January the

women take responsibility for weeding It takes as long as three weeks to

weed a hectare of maize so family time is fully occupied On rainy days

men make repairs around their huts while women manage household af-

fairs When labor is scarce some mobilize workers by throwing home-

brewed beer parties others trade labor and work together During April

through June labor is in short supply and entire villages participate in har-

vests Women are chiefly responsible for harvest but men and older chil-

dren assist Women headload food crops in 50 kilogram bags from the

fields to storage bins In rare cases where oxen or motorized transport is

used men take responsibility for the task

Although agriculture is the main source of well being in Kefa all house-

holds are engaged in non-agricultural activities Some brew and sell beer

others practice crafts such as weaving or woodworking many engage in

petty trading and others are healers scribes or have specialized skills

Cattle raising and off-farm incomes supplement farm incomes and help

families buy farm and household equipment clothes and blankets and

134


pay for services such as school fees Off-farm activities are divided by

gender women brew and sell beer trade and weave while men more

often have specialized skills work with wood or do repairs Incomes earned

in these activities are held separately by men and women and women are

eager to engage in such activities because the money they earn provides

them a degree of autonomy in decision making

Families in Kefa are structured in different ways Only about half of the

households are nuclear in the sense of two parents and children About a

third of households are headed by women some divorced or widowed

some whose husband is absent Children participate actively in household

economic life by age 5 most contribute to household tasks and past 8

years farmwork increases Boys are responsible for tending cattle while

girls assist their mothers in the house and care for younger siblings Most

children attend schools but are excused during periods of peak agricul-

tural labor The elderly live with their families or are cared for by family

members The poorest of the poor have few relatives and depend on hand-

outs from other villagers

BOX 7-1 continued

in Chapter 6 As a part of a diversified livelihood strategies familymembers often work off the farm part time sometimes on neighboringfarms sometimes in other areas as they seasonally migrate and some-times outside agriculture Petty trading often carried out by women isa common off-farm livelihood strategy in many countries

Although family labor is important traditional farms may hiresome labor at least during the busy times of the year Low wages causedby high underemployment in peasant agriculture create incentives tohire laborers That is traditional farmers can hire labor or buy a smallamount of leisure and enhance their social status at relatively low costThe people with the lowest economic and social status are usually notthe owners of small traditional farms but landless workers hired bythose farmers

SeasonalityLabor use in traditional agriculture varies seasonally along with agri-cultural cycles During slack seasons those immediately following plant-ing or preceding harvest labor may be abundant However during peakseasons especially during weeding and harvest labor can be in shortsupply Wages often exhibit similar seasonal fluctuations The seasonalnature of agricultural production causes variations in consumption and

135


nutritional status particularly in African settings Because storagefacilities may be lacking and mechanisms for saving and borrowingincomplete consumption patterns can follow agricultural cycles Itis common to find lsquolsquolean seasonsrdquo when consumption is low andshort-run malnutrition high especially immediately prior to harvest(see Box 7-2)

BOX 7-2

SEASONAL MIGRATION A RATIONAL RESPONSESeasonal weather patterns cause traditional farmers to adopt production

and consumption patterns to help smooth variations Seasonality also in-

duces migration as people search for employment opportunities and food

Other seasonal causes of migration are trade and marketing cultivation of

secondary landholding and pasturing cattle Seasonal migration is a world-

wide phenomenon In some rain-fed areas of Africa 30 to 40 percent of

the economically active population migrates while in rural Nepal as much

as 30 percent of the households have at least one member who migrates

Why does seasonal migration occur During the lean season labor

demands on the farm are low incomes are stretched and food can be in

short supply Other rural regions may have crop conditions (due to environ-

mental factors technologies or irrigation) that alter the agricultural calen-

dar and create counter-cyclical demands for workers Large plantations

commonly producing many export crops also demand labor on a seasonal

basis Seasonal rural-to-urban migration involves workers migrating to

towns cities and mines in search of work These reasons combine to

push migrants out of regions where their labor is temporarily in surplus and

pull them into areas with high demands for labor

Seasonal migration is not inefficient nor is it caused by factors such as

imperfect labor markets It is a natural adaptation to highly seasonal agri-

cultural cycles and can smooth family incomes and consumption Sea-

sonal migration also provides insurance in the event of a crop failure fam-

ily income can be maintained in the short-run by migration

Seasonal labor flows have benefited countries by minimizing labor

shortages in harvest times Exports of cocoa and coffee from forest re-

gions of Western Africa are largely made possible by seasonal migrants

who provide labor during harvest Other regions of the world have seen

their total production possibilities shift outward as labor moves to fill sea-

sonal gaps

Source Material was drawn from David E Sahn ed Causes and Implications of

Seasonal Variability in Household Food Security (Baltimore Johns Hopkins

University Press 1987)

136


Productivity and EfficiencyTraditional farms are characterized by low use of purchased inputs otherthan labor Yield per hectare production per person and other mea-sures of productivity tend to be low These factors do not mean how-ever that traditional farms are inefficient As T W Schultz points outtraditional farms tend to be poor but efficient3 Why

The crop varieties power sources methods for altering soil fertil-ity and certain other factors available to traditional farms constrainproductivity growth and hence reduce returns to labor and traditionaltypes of capital Efficiency as measured by equating marginal returnsto resources in alternative uses is often high In other words given thetechnologies available to traditional farmers they tend to do a good jobof allocating labor land and other resources The implication is thatjust reallocating the resources they currently have will not have a majorimpact on output

It makes sense that with static levels of technology physical con-ditions and factor costs farmers would gradually become very effi-cient at what they do When conditions change rapidly many of themistakes in resource allocation occur Also one must be careful not toequate limited education (another common characteristic in traditionalagriculture) with lack of intelligence

A situation with low use of certain inputs low productivity buthigh economic efficiency under static conditions has important impli-cations if productivity is to be increased First new technologies canhelp to change the production possibilities available to farmers Sec-ond investments to improve the quantity and quality of productiveassets such as land can stimulate income growth Third education maybe needed to help farmers learn to adjust resource use to changing con-ditions so as to maintain their high levels of efficiency However underthe static conditions of traditional agriculture education will do littleto improve productivity since peasant producers are already relativelyefficient

Rationality and RiskTraditional farmers are economically rational They are motivated toraise their standard of living while of necessity they are cautious Tra-ditional farmers are not adverse to change but proposed changes mustfit into their farming systems without altering too abruptly the meth-ods they have developed over time to reduce risk and spread out labor

3 Theodore W Schultz Transforming Traditional Agriculture (Chicago University ofChicago Press 1964) p 38

137


use Traditional farmers face many risks including weather-relateduncertainty agricultural pests and diseases price and market-relatedrisks and human health risks Decisions often reflect attempts to man-age this risk Because formal risk management mechanisms such as in-surance are often not available traditional households turn to informalmechanisms in response to a risky environment4

One mechanism by which traditional farmers spread risk is byexchanging labor and other resources through joint and extended fami-lies By joint and extended families we mean relatives (and sometimesfriends) beyond parents and their children In many countries a sub-stantial degree of sharing labor and goods occurs among friends andneighbors which not only adds to social status but spreads risk Recip-rocal agreements to assist others in times of need can spread risk acrossspace through agreements with people facing other agro-ecologicalconditions or in different regions across economic sectors throughmigration and work choice and across time through inter-generationalsharing Some of these informal arrangements may deteriorate as de-velopment proceeds creating a need for new institutional arrangementsto manage risk

Another risk-spreading mechanism is reliance on diversified live-lihood strategies Traditional farmers frequently plant multiple cropson a single plot of land in a single season For example maize and beansare planted together throughout Latin America in Africa maize is in-tercropped with sweet potatoes groundnuts and other foods depend-ing on the location Intercropping reduces reliance on success in a singlecrop and helps manage risk Off-farm employment further diversifiesincome sources

Off-farm EmploymentBecause agriculture is so visible in developing countries it is easy toassume that rural dwellers are only farmers In reality in most coun-tries off-farm income is an important source of earnings especially forthe rural poor Many landless and near-landless families provide laborto other farmers these agricultural labor markets are described in moredetail in Chapter 13 Others work in non-agricultural enterprises someare self-employed producing goods and services for sale Non-farmemployment involves small-scale rural manufacturing transport ser-vices and petty trading Income from these enterprises helps offset

4 See Paul B Siegel and Jeffrey Alwang An Asset Based Approach to Social Risk Manage-ment SP Discussion Series 9926 Human Development Network Social ProtectionUnit the World Bank Washington October 1999

138


fluctuations in earnings from agriculture representing a risk-manage-ment strategy It can smooth intra-year variations in on-farm labor de-mands Rural non-farm employment accounts for about 35ndash30 percentof income across the developing world5 Non-farm income is particu-larly important for women who can combine their household obliga-tions including child care with work The percentage of rural workersin the non-farm sectors varies from country to country but generally isin the range of 20ndash50 percent6 Between 1960 and 1990 in Asia the pro-portion ranged from 67 percent in Taiwan to 20 percent in China Off-farm employment is a higher proportion of total employment in Asiaand Latin America than in Africa but even in Africa it exceeds 60 per-cent in countries such as Botswana and Swaziland

THE ROLES of LIVESTOCKLivestock play many vitally important roles in traditional farming sys-tems roles that are sometimes misunderstood by outsiders Since about60 percent of the poor in sub-Saharan Africa and Asia are dependent onlivestock for some part of their livelihoods7 there is need to improveanimal productivity in developing countries Livestock systems canplace pressure on the environment while environmental stress andchange has important implications for small-scale producers There islittle doubt that when crops and livestock directly compete for the sameresources it is usually more efficient for humans to consume grain thanit is to feed the grain to livestock and consume meat However in mosttraditional farming systems livestock consume little grain Letrsquos con-sider several roles of livestock and some of the factors leading to changein livestock production systems

Buffers and Extenders of the Food SupplyFarm animals provide a special protection to farm families acting as abuffer between the family and a precarious food supply Animals are

5 See Steven Haggblade Peter Hazell and Thomas Reardon Strategies for StimulatingPoverty-Alleviating Growth in the Rural Nonfarm Economy in Developing Coun-tries EPTD Discussion Paper No 93 International Food Policy Research Institute 2002

6 See Nurul Islam ldquoThe Nonfarm Sector and Rural Development Review of Issuesand Evidencerdquo 2020 Discussion Paper Number 22 International Food Policy ResearchInstitute 1997

7 D Thomas and D Rangnekar ldquoResponding to the increasing global demand foranimal products implications for the livelihoods of livestock producers in devel-oping countriesrdquo in Responding to the Livestock Revolution The Role of Globalisationand Implications for Poverty Alleviation ed E Owen T Smith M A Steele S Ander-son A J Duncan M Herrero J D Leaver C K Reynolds I Richards J C Ku-VeraBritish Society of Animal Science Publication 33 Nottingham University Press 2004

139


like a savings bank and an insurance plan Farmers can invest in themthey grow and they can be consumed or sold during crop failures Inmost traditional agriculture livestock do not directly compete with cropsbecause they eat crop residues feed off steep slopes and poor soils andconsume materials which ldquoextendrdquo the food supply Many are rumi-nants (eg cattle goats sheep and buffalo) eating grass and other for-ages that humans cannot and converting them to products for humanconsumption Livestock also make important contributions to the qual-ity of the diet by providing meat milk and eggs Small amounts ofthese high-protein nutrient-rich foods can have a significant impact onhuman health

Sources of Fertilizer Fuel Hides and HairAnimal manure is vitally important as a source of fertilizer and fuel inmany countries For example in the remote hills of Nepal it is difficultto obtain chemical fertilizer Animal manure increases soil fertility andadds organic matter In countries where wood is scarce animal dung isdried and burned for fuel Often these two uses of animal manure com-pete Dung that is burned cannot be used to increase soil fertility InIndia and other countries methane digesters have been developed andthe gas produced is used for cooking and the residual nitrogen appliedto crops

Few livestock products are wasted in traditional society Clothingand blankets are made from animal hides and hair of not only cattleand sheep but buffalo goats and other livestock

A cow is a type of savings bank in Kenya

140


Providers of Power and TransportIn many countries livestock are the principal source of power Theyplow the fields transport products to market and are used in process-ing tasks like grinding sugarcane Tractors are still relatively rare inmany developing countries The large investments needed to purchasetractors make them prohibitively expensive for traditional farmers Andon the steep slopes and rough terrain in parts of some developing coun-tries it will be many years if ever before mechanical power replacesanimal power

Social and Cultural SymbolsLivestock particularly cattle and goats are highly valued in some soci-eties for social and cultural reasons A familyrsquos social status may bemeasured by the number of animals it owns8 Cattle are given as giftsduring ceremonial occasions While livestock serve major economicfunctions they serve these other social and cultural functions as well

Changes in Livestock SystemsRapid urbanization and growing incomes in many developing coun-tries have been associated with increased demands for animal proteinsas a food source a phenomenon that has been named the livestock revo-lution9 Growing demand has raised meat prices and put pressure onglobal livestock systems10 While much of this demand will be met byindustrial producers traditional farmers can play a role This role isprobably strongest in the dairy sector as cheese can be produced on asmall scale Traditional farmers particularly those with access to graz-ing land can also benefit from increased prices of cattle and other ru-minants

An additional strain on livestock systems comes from climatechange which is discussed in more detail in Chapter 9 Although im-pacts of climate change will vary by location it is likely that substantial

8 In nomadic societies where no individual family owns the land animal ownership isalmost the only criterion available for measuring social status

9 C Delgado M Rosegrant H Steinfeld S Ehui and C Courbois ldquoLivestock to 2020the next food revolutionrdquo Food Agriculture and the Environment Discussion Pa-per 28 IFPRIFAOILRI Washington DC USA 1999

10 Scientists at the International Livestock Research Institute (ILRI) have identifiedthree main livestock systems agro-pastoral and pastoral systems where naturalresources are constrained and people adopt strategies to meet these constraintssmallholder crop-livestock systems where natural resources may be managed toimprove productivity and highly intensive industrial livestock systems

141


Farmer plowing with bullock in Thailand

temperature increases will occur in many areas with especially harshconsequences on tropical drylands where livestock grazing predomi-nates Feed resources in these areas will decline along with water avail-ability while increased temperatures will increase livestock consump-tion of already scarce water

A final challenge to livestock systems is related to their adverseimpacts on the environment As noted livestock often feed on steeplysloped and low-productivity lands As a result they contribute to lossof soil cover soil erosion and nutrient-laden run-off that pollutes sur-face water For example in many areas of Central America water qual-ity issues are tied to livestock grazing on fragile lands ground cover isbeing lost and erosion leads to siltation and bacterial pollution in riv-ers It is critically important that all these challenges to traditional live-stock producers be met through research and policy changes that in-crease productivity and reduce the pressure on fragile environments

IMPLICATION of TRADITIONAL FARMS for AGRICULTURAL

DEVELOPMENTDespite the common features described above one of the striking char-acteristics of farms in developing countries is their diversity How landis organized and controlled within farms gender roles ties to formalmarkets use of mechanical or animal traction institutional relation-

142


ships with respect to water rights and access to irrigation and manyother factors differ markedly across regions and sometimes within coun-tries Farms in much of Sub-Saharan Africa are still quite traditionalwhereas farms in many parts of Asia and the Pacific have begun to in-tensify and modernize In the next chapter we discuss factors that causelivelihood strategies and farming systems to change over time

Traditional farms are efficient but poor As population grows andless land is available per farmer poverty increases unless agriculturechanges as noted in Chapter 5 unless agricultural productivity growthoutstrips population growth rural poverty will increase over time Butchange brings additional risks and the danger of increasing income dis-parities The distribution of income generated through new plant vari-eties or power tillers can be affected by asset distribution patterns andinstitutions that govern the rules of behavior in society Risks must bemanaged and institutions that substitute for the historical sharing ar-rangements must be created Improved transportation systems areneeded to improve information flows and build market linkages

Several Asian countries face a need to alter their farming systemsand to diversify out of rice While rice will remain the dominant agri-cultural commodity vegetable and livestock production become increas-ingly attractive because of changing consumer demands as incomesgrow Additional education and non-farm employment opportunitiesbecome important elements in an overall development strategy Other-wise the law of diminishing returns will doom traditional farmers topoverty for the foreseeable future African farmers face problems of lowsoil fertility lack of access to markets and low opportunity costs oftime

As incomes grow in many developing regions consumer demandschange and the global economy will respond to these changes in de-mand Growth in meat and milk demand will put pressure on tradi-tional livestock grazing systems and policies may be needed to smooththe transition to more commercially oriented confinement and open-access grazing systems Without such policies market-based pressuresmay lead to social dislocation and environmental degradation in live-stock-producing areas

SUMMARYTraditional agriculture is diverse but traditional farms have some com-mon characteristics Traditional agriculture is generally characterizedby small farms with intertwined farm and family decisions Traditionalfarm families consume sell or trade most of their products locally Theirlabor use and land area per farm are small but labor input per hectare

143


is high Hired labor is often important These product and labor salesand purchases mean that farmers are in general closely linked to thelocal economy and respond to market signals Productivity and use ofpurchased inputs are low but efficiency is relatively high Traditionalfarmers are rational but risk averse They often live in extended or jointfamilies Livestock play many roles including extending the food sup-ply providing a buffer against poor harvests improving the quality ofthe diet generating fertilizer fuel hides and hair They also providepower and transport and meet social and cultural needs Traditionalfarms differ by region and as farms change some people particularlythe landless may be left behind unless new technologies are accompa-nied by improved institutions and education

IMPORTANT TERMS and CONCEPTSAsset distribution pattern Mixed croppingBiological technologies Off-farm employmentBuffers and extenders Poor but efficientDiversification Rational but cautiousIntermixing of farm and family decisions Role of livestockJoint and extended families SeasonalityLandless labor Semi-subsistence farmsLivelihoods Traditional agriculture

Traditional farmers in Bangladesh

144


Looking AheadA wide variety of agricultural systems are found in the world Thesesystems evolve over time In the next chapter we examine the factorsthat influence the type of farming systems found in a particular coun-try at a point in time The importance of technical human institutionaland political factors is discussed Several common types of agriculturalsystems are described and the significant roles of women and childrenare highlighted

QUESTIONS for DISCUSSION1 Why might traditional farms be fairly conservative or slow to

change from current practices2 Are traditional farms subsistence farms What is meant by ldquosubsis-

tencerdquo3 Why are livestock important in many traditional farming systems4 Distinguish between productivity and efficiency Why do tradi-

tional farms tend to have high levels of efficiency Why do theytend to have low or high levels of productivity

5 What factors influence resource allocation on traditional farms If afarmer fails to adopt a new apparently more profitable farmingpractice is he or she irrational

6 If traditional farmers use resources efficiently why should we beconcerned with raising productivity by increasing the use of newtechnologies

7 Are the farmers who own 1 to 3 hectares the poorest people in ruralcommunities in developing countries

8 Why are joint and extended families still important in many devel-oping countries

9 Why are farm and household decisions often inseparably linked indeveloping countries

10 Why are institutional changes often as important as technologicalchanges for agricultural development

11 Why do farmers practice mixed cropping Are agricultural diver-sification and mixed cropping synonymous

12 Why is hired labor often important in traditional or semi-subsistence agriculture

13 Why are new biological technologies often more important thannew mechanical technologies for fostering agricultural develop-ment

14 Why is agricultural diversification becoming increasingly impor-tant in many Asian countries

145


RECOMMENDED READINGSDixon John and Aidan Gulliver with David Gibbon Farming systems and

poverty improving farmersrsquo livelihoods in a changing world (Rome and Wash-ington DC FAO and the World Bank 2001)

Ellis F Rural Livelihoods and Diversity in Developing Countries (Oxford Ox-ford University Press 2000)

Hayami Yujiro Anatomy of a Peasant Economy A Rice Village in the Philip-pines (Los Banos Laguna Philippines International Rice Research Insti-tute 1978)

Hopper W David ldquoAllocation Efficiency in a Traditional Indian Agricul-turerdquo Journal of Farm Economics vol 47 (1965) pp 611ndash25

Norman David W ldquoEconomic Rationality of Traditional Hausa DrylandFarmers in the North of Nigeriardquo in Robert D Stevens ed Tradition andDynamics in Small-Farm Agriculture (Ames Iowa State University Press1977)

Schultz Theodore W Transforming Traditional Agriculture (New HavenConn Yale University Press 1964)

Siegel Paul and Jeffrey Alwang An Asset Based Approach to Social RiskManagement SP Discussion Series 9926 Human Development NetworkSocial Protection Unit the World Bank Washington October 1999

Skjonsberg Else Change in an African Village Kefa Speaks (West HartfordConn Kumarian Press 1989)

Wolgin J M ldquoResource Allocation and Risk A Case Study of SmallholderAgriculture in Kenyardquo American Journal of Agricultural Economics vol 54(1975) pp 622ndash30

146


CHAPTER 8

Agricultural Systems and

Their Determinants

The agricultural pattern that has emerged in each area is in part the

result of ecological factorsmdasha particular combination of climate and

soilmdashand in part the result of economic and cultural factors in the

society that grows the crops mdash Robert S Loomis1

This Chapter1 Identifies factors that influence the agricultural systems found in a

particular country at a point in time2 Explores the differences in farming systems found in various parts

of the world3 Presents economic concepts that help explain input and output

choices in farming systems

MAJOR DETERMINANTS of FARMING SYSTEMSFarming systems in each region of the world show considerable vari-ety and are differentiated by how production is organized by the na-ture of technologies employed and by the types of crops and livestockproduced Each system consists of a small number of dominant crops(or livestock) and numerous minor crops (or livestock) We must un-derstand agricultural systems if we are to improve them therefore letrsquosexamine the primary determinants of the prevailing systems before clas-sifying and describing them

Technical institutional and human factors affect the type of agri-cultural system that predominates in a region These factors interact ateach location and point in time to provide a unique environment foragricultural production (see Figure 8-1) When these factors remain con-stant for several years the farming system that evolves represents along-term adaptation to that environment Different farming systems

1 Robert S Loomis ldquoAgricultural Systemsrdquo Scientific American September 1976 p 69

147


Fig

ure

8-1

M

ajo

r d

ete

rmin

an

ts o

f th

e fa

rmin

g s

yste

m a

t a

po

int in

tim

e

148


have different needs for public support such as infrastructure legalsystems market-related rules and norms They also have different im-pacts on the natural environment Economic development can intro-duce rapid changes in underlying factors thus placing pressure on asystem

Technical Determinants of Farming SystemsTechnical elements including both physical and biological factors helpdetermine the potential types of crop and livestock systems Physicalfactors mdash including climate land water access capital items and dis-tance to markets mdash are unique to each location although water accessand other capital items can be altered through investments and newtechnologies Similarly investments in roads alter the relationship be-tween physical distance and travel time For example the nomadismdiscussed below that prevails in many arid regions of the world rep-resents an adaptation to harsh climates However the introduction ofwells has encouraged more settled farming or ranching in parts of no-madic areas Global climate change is likely to have a profound effecton farming systems and we are already seeing adjustments to agricul-tural practices as weather patterns and temperatures change

Biological factors including pests and crop and livestock varietiesare even more susceptible to modification In the short-run howeverthese factors play a major role in defining the prevailing agriculturalsystem The existence of the tsetse fly in areas of the African humidtropics has created farming systems that are dramatically different fromthose in similar climates where the fly does not exist Animal traction isnot an option in areas where the tsetse fly is common Technologies tocontrol the fly can help spread animal traction and alter traditional farm-ing relations

Institutional and Human Determinants of Farming SystemsInstitutional and human elements influencing farming systems are char-acterized by both exogenous (externally controlled) and endogenous(internally controlled) factors Factors largely outside the control of in-dividual farmers include social and cultural norms and beliefs histori-cal factors population density market opportunities and marketingsystems and off-farm employment opportunities For example highpopulation densities in many South Asian countries are partly respon-sible for the very different farming systems there as compared to thesystems found in the relatively low-density areas of sub-Saharan Af-rica and Southeast Asia

149


Politically determined institutions such as pricing policies creditpolicies macroeconomic policies trade policies and land-tenure sys-tems affect the farming system Land ownership is highly skewed inmany countries In areas of Central America for example large com-mercial farms and plantations exist alongside small peasant subsistenceand semi-subsistence farms The farming practices used in these areasare significantly influenced by the distribution of land plantations relyon landless and small holding workers as suppliers of labor and thelaborers mix off-farm incomes with food crops grown on their ownholdings These small holders adopt diversified livelihood strategieswithin the overall context of their farming system The prevailing pat-terns of land uses crops produced and technologies on different-sizefarms is clearly affected by the distribution of land holdings In manyareas of the world people have only use-rights over the land they farmIn much of Africa for example families are given land to farm but theycannot rent or sell it to others and cannot use it as collateral for creditSuch land-use institutions influence incentives for investments in landimprovements which in turn influence the prevailing farming sys-tem The political system itself may dictate collectives communes orprivate property as the primary means of organizing land use in agri-culture

Endogenous or farmer-controlled determinants of agricultural sys-tems include family labor management ability education knowledgeas well as the goals for which farmers are striving Investments in edu-cation affect the value of time used on and off the farm and as educa-tional levels change farming systems change in response The risk as-sociated with agricultural production particularly in arid rain-fed re-gions has forced farmers to adapt their practices to ensure survivalThese adaptations are determined in part by the farmersrsquo degree ofrisk aversion which is affected by income education etc Any of theseexogenous or endogenous factors can change over time New technolo-gies and population growth are two particularly important determi-nants of how and in what direction agricultural systems change overtime

MAJOR TYPES of FARMING SYSTEMSWhile the specific type of farming system in use depends on a largenumber of factors (see Figure 8-1) many years ago Duckham andMasefield grouped farming systems into three basic types shifting

150


cultivation pastoral nomadism and settled agriculture (Fig 8-2)2

Settled agriculture includes many subtypes Letrsquos briefly examine eachof these systems

Shifting CultivationShifting cultivation is an old form of agriculture still practiced in manyparts of the world As the name implies it involves shifting to a newpiece of land when the fertility of the original patch runs out or whenweeds and other pests take over The movement may be fast or slowand animal manure may extend the use of one location Migration fromone piece of land to another may be random linear or cyclic Whencyclic the rotation frequency can last as long as 30 to 45 years

Shifting cultivation also has been called slash and burn because usu-ally new areas are cleared by slashing the brush with a machete andburning it to clear the fields and release nutrients into the soil Capitalinvestment in the farm is low with machetes digging sticks and hoesbeing the primary tools Typical crops include corn millet and sorghumrice and roots Usually the crops are mixed Shifting cultivation is stillpracticed on about 15 percent of the worldrsquos exploitable soils particu-larly in Africa and Latin America It is popular where population pres-sures are not too severe

Shifting cultivation is frequently associated with insecure controlover the land either because of absentee government or unclear own-ership status It has been linked to soil erosion and other environmen-tal problems in several developing countries partly because there arefew incentives to invest in practices that maintain soil fertility

Pastoral NomadismPastoral nomadism involves people who travel more or less continu-ously with herds of livestock Pastoral nomads have no establishedfarms but often follow well-established routes from one grazing areato another Although probably only about 15 million pastoral nomadsare found in the whole world they move through an area almost aslarge as the entire cultivated area in the world They are especially preva-lent in the arid and semi-arid tropics Some examples include the Masaiof Kenya and Tanzania the Hima of Uganda the Fulani of West Africathe Bedouin of the Eastern Mediterranean and the nomads of Mongolia

2 See Alec N Duckham and G B Masefield Farming systems of the World (LondonChatto and Windus 1970) Substantial variation is observed within these highlystylized farming system typologies

151

Fig

ure

8-2

E

xa

mp

le o

f a

cla

ssific

atio

n o

f w

orl

d fa

rmin

g s

yste

ms


152


Pastoral nomadism can be total or partial In the latter case thenomads have homes and some cultivation for part of the year Typi-cally five or six families travel together with 25 to 60 goats and sheep or10 to 25 camels Sometimes they own cattle as well The livestock eatnatural pasture and their productivity is low

Pastoral nomadism is associated with a variety of problems Be-cause grazing takes place on common land there is a tendency for over-grazing because every individual farmer wishes to maximize his or hernumber of animals As the animal population increases grazing areasdeteriorate and incomes shrink This problem is known as the ldquoTrag-edy of the Commonsrdquo and ample evidence shows that traditional man-agement systems have evolved in response to it Little scope for techni-cal improvement exists in pastoral nomadic systems and serious prob-lems arise in years of drought As the human population grows addi-tional pressures are placed on the resource base supporting the nomadicsystem Global climate change presents an especially acute problem forpastoral nomad systems Increases in temperatures will reduce pastureproductivity and increase demand for water and both factors will lowerproductivity Accelerating desertification will result and will furtherlower productivity

Settled AgricultureSettled agriculture includes a variety of agricultural systems such asmixed farming systems intensive annual crops intensive and extensive

Nomads are common in the northern half of Africa(photo Mesfin Bezuneh)

153

livestock systems and perennial crops The dominant farming systemsresult from an enormous amount of human experimentation The sys-tems we see most often produce a relatively high and certain return instorable products per unit of effort They have spread from farmer tofarmer replacing other settled systems that are far less productive

Mixed farming usually involves a mixture of crops and livestockFew farming systems in developing countries consist of just one com-modity However what is meant by mixed farming is the integration ofcrops and livestock production As mentioned in Chapter 7 mixed farm-ing is common in traditional agriculture because it produces relativelyhigh returns while helping to manage risk makes efficient use of laborand land and helps maintain soil fertility

Intensive annual crops are extremely important in the world About70 percent of the cultivated area of the world is planted to the majorgrain crops which include wheat rice and corn Other important an-nual crops are barley millet sorghum roots tubers vegetables andpulses (such as beans peas and peanuts)

Perennial crops are grown and harvested over several years andinclude crops such as cocoa coffee bananas and sugarcane Some aregrown in large plantations but often on very small farms as well evenin the same country On small-scale farms perennial crops are ofteninterplanted with annual crops such as corn and beans Perennial cropstend to be high-valued and are frequently exported They also can helpprevent soil erosion and preserve biodiversity in ecologically fragileareas

Intensive livestock systems include both ruminants (for examplecattle buffalo sheep and goats) that produce milk meat fiber dungand other products and non-ruminants (for example pigs and poultry)that are particularly important for their meat and eggs These animalsare often fed grains in addition to pasture and forage In a few coun-tries intensive livestock systems involve carefully managed grasslandsor pasture

Extensive livestock systems include a variety of grazing systems onsemi-arid range high and cool mountain pastures wet lowlands andmore Livestock may graze on leaves as well as grass

In summary a large number of crop and livestock systems existmany of which have been relatively productive or at least well suitedto their environment As population expands and other conditionschange a particular system may no longer be adequate and is forced tochange (see Box 8-1) Few systems are static for very long today andseveral offer potential for improved productivity


154


BOX 8-1

POPULATION DENSITY AND AGRICULTURAL SYSTEMSThe intensity of land utilization varies worldwide and there is a close rela-

tionship between this intensity and the density of population in a particular

region Boserup hypothesized that pressure from increasing population has

caused a shift in recent decades from more extensive to more intensive

systems This classification scheme traces a continuum from shifting cul-

tivation to settled agriculture

1 Forest fallow cultivation one- to two-year planting of plots followed by

a 20- to 25-year fallow period

2 Bush fallow cultivation 6- to 10-year fallow period Periods of uninter-

rupted cultivation may be as short as 1 to 2 years or as long as 5 to 6

years

3 Short fallow cultivation fallow lasts one or a couple of years

4 Annual cropping land is left uncultivated only between the harvest of

one crop and the sowing of the next

5 Multi-cropping the most intensive system of land use the land bears

two or more successive crops every year

Boserup hypothesized that increased population densities put pres-

sure on food production systems to increase outputs Successively more

intensive systems require increased labor inputs for weeding and cultiva-

tion and more varied farming implements In forest fallow cultivation only

an axe is needed and as the fallow period is shortened implements such

as hoes plows and even irrigation systems are used

Different patterns of land use exist within similar agro-climatic zones

For example the land used for intensive cultivation in parts of Nigeria is

remarkably similar to the land used for long fallow cultivation in the same

country Thus Boserup concluded that humans not only adapt to the cli-

matic conditions they face but actually change the relationship between

the conditions and agricultural output by using methods that enhance soil

fertility These adaptations are mostly influenced by rates of population

growth

Source Ester Boserup The Conditions of Agricultural Growth (London Allen

and Unwin 1965) especially Chapter 1 pp 15-22

The Influence of the Political SystemIn Fig 8-1 political factors were listed as significant determinants offarming systems including land tenure systems The political systemcan dictate how property rights are allocated including collective com-mune and other types of land tenure arrangements When systems suchas collectives and communes restrict individual farmersrsquo responsibilities

155

and rights to manage farm resources in response to market signals theresult has usually been inefficiency and waste of those resources Po-litical systems that allow independent family farms to operate in com-petitive markets have generally yielded higher productivity levels andfaster growth rates over time A particularly important example of thisis the reform of communist Chinarsquos collective land tenure system

Beginning in 1979 China allowed individual farmers to respondmore freely to market incentives and since then has experienced sig-nificant increases in agricultural production (see Box 8-2) Adoption ofnew technologies and use of purchased inputs such as fertilizer haveincreased substantially These changes have occurred rapidly in Chinacausing important changes in world markets Remember that Chinahas more than 13 billion people Agricultural growth in China has overtime stimulated broad-based increases in income and this incomegrowth will have profound implications for food markets such as in-creased demands for animal proteins A challenge for the world foodsystem is to make adjustments to meet these emerging demands

Government policies other than rules governing land tenure alsoaffect farming systems Price policies that favor certain products overothers or promote the use of different inputs can have a strong impacton the types of crops planted on how long they are grown and even onthe degree to which traditional farmers interact with markets Policiesaffecting the value of the land create incentives for more or less invest-ments in land For instance policies that discriminate against agriculturesuch as export taxes are quickly reflected in lower values of agriculturalland Population and family planning programs can affect populationdensities which influence the nature of the agricultural system

In summary the major types of farming systems in the world in-clude shifting cultivation pastoral nomadism and several types ofsettled agriculture These systems particularly settled agriculture canbe affected in a major way by the political system in the country whichdictates private or public control over land use Other government poli-cies influence agricultural systems both directly and indirectly

ECONOMIC DETERMINANTS of INPUT USE and CROP and

LIVESTOCK MIXAs noted above policies can influence the evolution of farming sys-tems by changing relative prices of inputs and outputs Letrsquos examinemore carefully how economic factors affect the choice of inputs andmore broadly the type of farming system In Chapter 5 we introducedthe concept of an isoquant to illustrate that the same level of output can


156


BOX 8-2

CHINESE AGRICULTURAL SYSTEMSIn rural areas of China prior to 1979 the agricultural production system

was organized according to guidelines established in the national agricul-

tural plan Farming operations were organized into collective teams of 20

to 30 households these teams were required to sell fixed quantities of

output to the government at set prices Quantities produced in excess of

the quotas were also surrendered to the government The collectives had

some freedom to adjust inputs but the acreage planted to each crop was

determined by government planners

This rigid system led to stagnation in agricultural output Between 1957

and 1978 per-capita grain production grew at a 03 percent annual rate

while soybean and cotton production per capita declined respectively by

30 and 06 percent annually In 1978 rural incomes were virtually identical

to levels of 20 years earlier This poor performance of the agricultural sec-

tor had important implications in a country where 80 percent of the popula-

tion resides in rural areas

In 1978 the government decided to introduce the Household Respon-

sibility System which restored individual households as the basic unit of

farm operation Under this system a household leases a plot of land from

the collective and after fulfilling a state-set grain procurement quota can

retain additional output This output can be consumed or sold to the gov-

ernment The households have flexibility to determine acreage for indi-

vidual crops At the same time the government prices of agricultural com-

modities were increased and the prices paid for above-quota grain pro-

duction were increased substantially above quota prices Agricultural out-

put began to grow rapidly following these reforms and agricultural growth

averaged 6 per year from 1978ndash2003 These reforms led to a wholesale

change in the Chinese agricultural system by 1983 over 97 percent of the

collective teams in China had been converted to the new system

Sources Justin Y Lin ldquoThe Household Responsibility System Reform and the

Adoption of Hybrid Rice in Chinardquo Journal of Development Economics vol 36

(2) 1991 pp 353ndash73 Ehou Junhua ldquoEconomic Reform Price Readjustment

(1978ndash87)rdquo Chinese Economic Studies vol 24 (3) Spring 1991 pp 6ndash26

be produced with more than one combination of two inputs The con-cept of allocative efficiency relates to how well farmers choose the correctamounts of inputs to apply and outputs to produce given the availabletechnology assuming they are trying to maximize profits While farmand family decisions are inter-mingled their success and even survivaldepends in part on how efficiently they allocate their productive assets

157

Figure 8-3 Input efficiency given relative input scarcity

Efficient farmers are able to combine inputs in a way that reflects theirrelative prices Efficient farmers also choose the most profitable outputlevels The farming systems described in this chapter vary in terms ofintensity of input use and productivity but they all represent long-termadjustments to prevailing conditions As a result we can conclude thatthey are efficient As relative scarcity (and hence prices) of inputs andoutputs change these efficient producers will make adjustments to in-put mixes and amounts of output

In Figure 8-3 the curved isoquant represents the combinations oflabor and animal power that can be used to produce a specific amountof output with a given level of all other inputs for example two tonsof corn on one acre of land We expect all farmers to produce some-where along this curve Production to the right or above the curve woulduse more inputs than needed and would be technically inefficient Pro-duction to the left or below the curve is technically impossible giventhe other resources and technology available to the farmer The slope ofthe isoquant is known as the Marginal Rate of Technical Substitution(MRTS) between the two inputs In this case the isoquantrsquos slope is theadditional animal time needed to save one hour of labor time We ex-pect farmers to adjust their use of animals and labor until the value ofthat labor time just equals the cost of adding animal time In terms ofthe graph we expect farmers to adjust until the slope of the isoquant


158


just equals the price of labor relative to the price of animal power Thatratio is the slope of the relative price line also called an iso-cost linebecause it traces a line of constant total cost The economically efficientinput combination is the point where the isoquant and the isocost curvesare tangent or where the MRTS equals the input price ratio If the priceof labor goes down relative to the price of animal power the isocostline would become flatter tangency would occur at a point farther downthe isoquant and more labor and less animal power would be usedThus the drive to be efficient leads to changes in input mixes and overtime this drive can alter the farming system As an example comparedifferences in farming systems between Africa where labor is relativelyscarce and land is relatively abundant and South Asia where labor isrelatively abundant and land relatively scarce

Similar trade-offs occur between different kinds of output In Fig-ure 8-4 the curved line represents the production possibilities frontier (PPF)or the combinations of corn and beans that can be produced with avail-able resources As with Figure 8-3 we expect farmers to produce some-where along this curve Production inside the curve would generateless output than is possible and so be technically inefficient Produc-tion outside the curve would be technically impossible given these re-sources and the technology The slope of the PPF is known as the Mar-ginal Rate of Transformation (MRT) In this case that slope is the amountof additional corn that can be produced with one less unit of beansAgain the allocatively efficient combination of outputs depends on therelative prices of these two outputs For example if the price of beansrises relative to the price of corn the iso-revenue line becomes steeperand it pays to shift more resources into producing beans and away fromcorn

Input and output combinations observed in farming systemsaround the world are heavily influenced by technologies resource basesand relative prices Farmers allocate resources to maximize their fami-liesrsquo well-being taking into account expected costs and revenues Eco-nomic profitability is just one factor they consider in their decision-making but usually an important one

SUMMARYFarming systems in the world exhibit considerable variability Both tech-nical and human factors determine the types of farming systems Tech-nical factors include both physical and biological factors Institutionaland human factors are characterized by both externally and internallycontrolled forces The major farming systems of the world can begrouped into three classes shifting cultivation pastoral nomadism and

159

Figure 8-4 Output efficiency given the technology and resource base

settled agriculture Settled agriculture represents a variety of agricul-tural systems including mixed farming systems intensive annual cropsintensive and extensive livestock systems and perennial crops

IMPORTANT TERMS and CONCEPTSFarming systems Perennial cropsHuman determinants of Political determinants of farming farming systems systemsIntensive annual crops Production possibility frontierIso-costs and iso-revenues Settled agricultureMixed farming system Technical determinants of farmingPastoral nomadism systems

Looking AheadIn this chapter we briefly examined the nature and diversity of exist-ing agricultural systems in developing countries and determinants offarming systems In the next chapter we focus on environmental ornatural resource problems that can influence the ability of a farmingsystem to improve and achieve sustainable development


160

QUESTIONS for DISCUSSION1 What are the major technical determinants of farming systems2 Describe the major human determinants of farming systems Be sure

to distinguish exogenous from endogenous factors3 How might the political system affect the nature of the farming sys-

tem4 What is shifting cultivation and why is it more commonly found in

Africa and Latin America than in Asia5 What is pastoral nomadism and what problems might be present in

this type of system6 Distinguish among the major types of settled agriculture7 How do the optimal quantities of inputs and outputs change as iso-

cost and iso-revenue lines become flatter and why8 In what sense is the Boserup argument presented in Box 8-1 consis-

tent with the discussion of economic determinants of input use andoutput choice

RECOMMENDED READINGSDuckham Alec N and G B Masefield Farming Systems of the World (Lon-

don Chatto and Windus 1970)Lin Justin ldquoAgricultural Development in Chinardquo Chapter 31 in Carl K

Eicher and John M Staatz eds International Agricultural Development(Baltimore Johns Hopkins 1998)

Ruthernberg Hans Farming Systems in the Tropics (Oxford Oxford Uni-versity Press 1980)


161

CHAPTER 9

Resource Use and

Sustainability

hellippoverty compels people to extract from the ever shrinking remain-

ing natural resource base destroying it in the process In fact the

major characteristic of the environmental problem in developing

countries is that land degradation in its many forms presents a clear

and immediate threat to the productivity of agricultural and forest

resources and therefore to the economic growth of countries that

largely depend on them mdash Schramm and Warford1

THIS CHAPTER1 Examines the nature of environmental or natural resource prob-

lems that influence the sustainability of agricultural developmentin developing countries

2 Identifies the principal causes of environmental problems in devel-oping countries

3 Discusses some potential solutions to environmental problems indeveloping countries

NATURE of ENVIRONMENTAL PROBLEMSSound management of natural resources is widely recognized as essen-tial for sustainable agricultural and economic development Yet the ef-fects of environmental degradation and poor natural resource manage-ment are increasingly evident throughout the world The wide-rangingyet often interrelated problems of soil erosion silting of rivers and res-ervoirs flooding overgrazing poor cropping practices desertificationsalinity water-logging deforestation energy depletion climate change

1 Gunter Schramm and Jeremy J Warford eds Environmental Management and Eco-nomic Development (Baltimore Johns Hopkins University Press 1989) p 1

162


loss of bio-diversity and chemical pollution of land water and air areincreasing problems in many developing countries The poorest coun-tries tend to be most dependent on their natural resource base and thushave the potential of being the most vulnerable to environmental deg-radation These countries find environmental problems particularly dif-ficult to solve because rapid population growth outmoded institutionalrelationships poverty and a lack of financial resources conspire againstsolutions The poorest people within these countries usually suffer themost from environmental degradation

As agricultural and economic development occur forces are set inmotion some reducing and others increasing the pressures on the envi-ronment Changes in the rate of population growth new technologiessocial and institutional relationships the increased value of human timeand shifts in the weight placed on future as opposed to current incomeall influence the relationship between human activity and the environ-ment Economic and environmental policies together with other insti-tutional changes can either alleviate or aggravate natural resource prob-lems The nature of particular types of environmental problems isdiscussed below followed by a description of causes and potentialsolutions

Global Versus Local ProblemsMany environmental problems are local in cause effect and potentialsolution Others are regional or even global Problems such as erosionmay be local but also have more widespread implications if soil is de-posited in rivers and transported to neighboring regions and countrieswhere the silt raises river levels causing flooding Others such as defor-estation may appear local but can affect the global climate as carbon isreleased into the atmosphere Environmental problems affect every na-tion in the world can hinder the long run-sustainability of farming sys-tems and appear to be a growing concern The following is a brief de-scription of the more serious environmental problems facing develop-ing countries

Soil Degradation Erosion Silting and FloodingTopsoil is one of the worldrsquos most important natural assets Farmersfrequently invest in trying to improve it through soil fertility amend-ments and by using soil conservation techniques But these investmentsare costly and the poorest farmers are often unable to borrow money toundertake them and less willing or able to wait for the future benefitsthey provide As a result we observe that the lowest-income farmersoften draw down their ldquosoil capitalrdquo applying insufficient soil amendments

163

2 See Norman Meyers ldquoThe Environmental Basis of Sustainable Development ldquo inSchramm and Warford eds Environmental Management and Economic Developmentp59

3 See Alfredo Sfeirounis ldquoSoil Conservation in Developing Countriesrdquo Western Af-rica Projects Department World Bank Washington DC 1986

Farming an erodible hillside in Ecuador

to fully replenish the nutrients removed at harvest or generated throughnatural processes In effect they are ldquominingrdquo soil nutrients The re-sulting soil degradation is usually reversible if and when farmers findit profitable to apply more nutrients than plants withdraw

An irreversible kind of degradation is excessive soil erosion dueto the exposure of soil to wind and water runoff The extent of the worlderosion problem is difficult to assess because few nations have system-atically surveyed their soil resources Nevertheless the amount of agri-cultural land being lost due to soil erosion is estimated to be at least 20million hectares per year2 An erosion rate of 50 tons per hectare is com-mon in upland watersheds in many developing countries whereas soilcan regenerate somewhere between 0 and 25 tons per hectare3

A loss of 50 tons per hectare represents only about 3 millimetersfrom the top of the soil yet often the gullies and exposed bedrock fromuneven erosion scar the landscape The effects on productivity are po-tentially serious Eroded soils typically are at least twice as rich in nu-trients and organic matter as the soil left behind Soil nutrient lossescan be partially replaced by use of chemical fertilizers but only up to apoint and fertilizer can be expensive At any rate the yields with


164


fertilizers are lower than they would be in the absence of erosion sothat erosion reduces productivity below its potential It is estimatedthat erosion of good soils in the tropics may be resulting in maize-yieldreductions of 10 to 30 percent4

Soils are seriously deteriorating in the hills of the Himalayas onthe steep slopes of the Andes Mountains in the Yellow River basin inChina in the Central American highlands in the Central Highlands ofEthiopia and on densely populated Java The worst erosion in terms ofaverage soil loss per hectare is found in the crescent from Korea to Tur-key in Eastern Europe and the former Soviet Union followed by theCentral American highlands and in the Sahel in Africa Differences aredue to the intensity of cultivation on highly erodible soils and avail-ability of soil conservation alternatives

The indirect or off-site effects of erosion through silting of riversand reservoirs are perhaps more serious than the on-site effects Whenreservoirs fill with sediment hydroelectric and irrigation storage ca-pacity is lost cutting short the useful lives of these expensive invest-ments When rivers silt up flooding occurs during rainy seasons Forexample soil erosion in the hills of Nepal causes flooding in the plainsof Nepal India and Bangladesh5 Flooding in the Yellow River basin inChina is another example

DesertificationExcluding real deserts potentially productive drylands cover about one-third of the worldrsquos land surface About one-sixth of the worldrsquos popu-lation lives in dryland areas that produce cereals fibers and animalproducts In arid regions with under 300 mm of annual rainfall vegeta-tion is sparse and nomadic herding of such animals as goats and cattlepredominates In semi-arid regions with 300 to 600 mm of rain dry-land farmers grow cereals such as wheat sorghum and millet in more

4 See Meyers The Environmental Basis of Sustainable Development ldquo in Schrammand Warford eds Environmental Management and Economic Development

5 While flooding is a serious periodic problem in many countries not all or even mostflooding is due to silt Low-lying countries such as Bangladesh and parts of EgyptIndonesia Thailand Senegal The Gambia and Pakistan are particularly vulner-able to flooding due to high river levels during the rainy season and sea surgesduring storms About 80 percent of Bangladesh for example is a coastal plain orriver delta In l998 approximately two-thirds of this country of 130 million peoplewas flooded While a certain amount of normal flooding can have a positive effecton agricultural production excessive flooding results in substantial loss of life fromdisease as well as drowning

165

Houses flooded in Dhaka Bangladesh

settled agriculture The semi-arid regions are smaller in area but moredensely populated than are arid regions

The term desertification applies to a process occurring in arid andsemishyarid regions Desertification involves the depletion of vegetativecover exposure of the soil surface to wind and water erosion and re-duction of the soilrsquos organic matter and water-holding capacity Inten-sive grazing particularly during drought years reduces vegetativecover the loss of vegetation reduces organic matter in the soil and thuschanges soil structure After a rain the earth dries out and becomescrusted reducing the infiltration of future rains Then even more veg-etation is lost for lack of water the surface crust is washed or crumblesand blows away leaving soil that is less fertile and unable to supportmuch plant life

Cropping particularly when very intensive and when combinedwith drought is another major cause of desertification If soil organicmatter is depleted by intensive farming practices and not replaced aprocess similar to that described above occurs As supplies of firewooddwindle people use dried manure for fuel rather than fertilizer As thesoil loses its fertility crop yields fall and wind and water erosion accel-erates Eventually the land may be abandoned

Moderate desertification may cause a 25 percent loss of pro-ductivity while severe desertification can reduce productivity by 50


166


percent or more It is estimated that 65 million hectares of productiveland in Africa have been abandoned to desert over the last 50 yearsDesertification is particularly a problem in the Sahel region of Africaand in parts of the Near East South Asia and South America In termsof people directly affected approximately 50 to 100 million people arecurrently dependent on land threatened by desertification Areas wheredesertification is a problem also tend to be areas with rainfall that isboth low and unpredictable The ensuing periodic droughts create short-term severe food crises in those areas

Salinity and WaterloggingIrrigation one of the oldest technological advances in agriculture hasplayed a major role in increasing global food production Howeverbringing land under irrigation is costly and degradation of irrigatedland through questionable water management practices is causing someland to lose productivity or be retired from production completely Themajor culprits are waterlogging and salinity

Seepage from unlined canals and heavy watering of fields in areaswith inadequate drainage can raise the underlying water table Almostall water contains some salts High water tables concentrate salts in theroot zones and also starve plants for oxygen inhibiting growth Inad-equate drainage also contributes to salinization when evaporation ofwater leaves a layer of salts that accumulate and reduce crop yields Atypical irrigation rate leaves behind about 2 to 5 tons of salt per hectareannually even if the water supply has a relatively low salt concentra-tion If not flushed out salt can accumulate to enormous quantities in acouple of decades

Estimates are that between one-quarter and one-half of the worldrsquosirrigated land is affected by moderate to severe salinization Some 20 to25 million hectares are affected in India 7 to 10 million hectares in Chinaand 3 to 6 million hectares in Pakistan Other developing areas severelyaffected include Afghanistan the Tigris and Euphrates river basins inSyria and Iraq Turkey Egypt and parts of Mexico

Deforestation and Energy DepletionForests play a vital role in providing food fuel medicines fodder forlivestock and building materials Tropical forests provide a home forinnumerable and diverse plant and animal species They protect thesoil recycle moisture represent a sink for atmospheric carbon dioxideand provide livelihoods for millions of human beings But forests arebeing cleared at a rapid rate During the 1980s about 15 million hect-ares of tropical forest were being cleared each year the rate has fallen

167

somewhat since then but today somewhere between 5 and 8 millionhectares per year are being lost6 The earthrsquos forested areas have de-clined by about one-half in the last century Deforestation continues ata rapid pace in countries such as Brazil Indonesia Mayanmar Zam-bia Tanzania and Nigeria These countries account for approximately60 percent of the Worldrsquos annual loss of tropical forests7

Deforestation creates environmental problems on land and in theair Forest clearing degrades soils and increases erosion in tropical wa-tersheds Soils in tropical forests tend to be fragile and unsuited forcultivation their fertility is quickly depleted as erosion follows the treeclearing In semi-arid areas deforestation contributes to loss of organicmatter increases wind and water erosion and speeds the rate of deser-tification As forests are burned to clear land carbon dioxide and car-bon monoxide are emittedinto the atmosphere contributing to climatechange It is estimated that more than 20 percent of the net increases toatmospheric carbon comes from deforestation

6 Freacutedeacuteric Achard Hugh D Eva Hans-Juumlrgen Stibig Philippe Mayaux Javier GallegoTimothy Richards Jean-Paul Malingreau ldquoDetermination of Deforestation Ratesof the Worldrsquos Humid Tropical Forestsrdquo Science 9 August 2002 vol 297 no 5583pp 999ndash1002

7 Food and Agricultural Organization of the United Nations 2006 Global Forest Re-sources Assessment Progress toward sustainable forest management FAO For-estry Paper 147 Rome 350 pp

Deforestation has led to soil erosion in Nepal


168


In developing countries seven out of ten people depend on fuelwood for meeting their major energy (cooking and heating) needs TheFAO estimates that three out of four people who rely on fuel wood arecutting wood faster than it is growing back When people cannot findfuel wood they turn to other sources of organic matter such as dungfor fuel thereby depleting soil fertility and aggravating soil erosionand desertification

Deforestation also threatens the worldrsquos biological diversity Tropi-cal forests cover only 7 percent of the worldrsquos landmass yet they con-tain more than 50 percent of the plant and animal species8 In Madagas-car for example there were until recently 9500 documented plant spe-cies and 190000 animal species most of them in the islandrsquos easternforest More than 90 percent of the forest has now been eliminated alongwith an estimated 60000 species9

Climate ChangeThe Earthrsquos climate is undergoing change Surface temperatures in-creased by 1oF during the 20th century and the 1990s were the hottestdecade of the century Projections of future increases range from 25oFto 104oF by 210010 Strong consensus now exists among the worldrsquos sci-entists that climate change is evident in shifts in ranges of flora andfauna earlier onset and lengthening of growing seasons and majorchanges in rainfall patterns Observed changes in abundance of plantand animal and changes in ecosystem compositions have been attrib-uted to climate change As world temperatures rise average sea levelsalso rise thus threatening coastal lands Violent storms monsoonsdroughts floods and generally increased weather variability are likelyAnd global climate change could alter disease prevalence and be veryhard on certain animal species because their ecosystem may shift whilethe property-line boundaries of their preserves do not

While there is some disagreement about the degree to which hu-man activities affect the rate of climate change it is clear that agricul-tural systems throughout the globe will feel its effects Impacts are likelyto vary substantially between regions In higher latitude areas agricul-tural productivity is predicted to rise with moderate temperature

8 See E O Wilson ldquoThe Current State of Biological Biodiversityrdquo chapter 1 in E OWilson ed Biodiversity (Washington DC National Academy Press 1988) p 8

9 See Robert Repetto ldquoManaging Natural Resources for Sustainabilityrdquo in SustainabilityIssues in Agricultural Development ed Ted J Davie and Isabelle A Shirmer (Wash-ington DC World Bank 1987) p 174

10 See Tom M L Wigley ldquoThe Science of Climate Changerdquo Pew Center on ClimateChange Report 2005

169

increases while sub-Saharan Africa and coastal areas in Asia are likelyto feel the strongest adverse effects Semi-arid and arid areas are par-ticularly vulnerable and will suffer a decrease in water availability in-creased likelihood of drought and growing heat stress In these sameareas groundwater resources are likely to decline so that moisture-re-lated plant stress will lower productivity Other areas will feel moremixed effects but overall the most likely outcomes are more variabilityin weather patterns including deeper and more prolonged droughtincreased temperatures and reduced productivity in rain-fed tropicaland sub-tropical agriculture reductions in access to fresh water andexpanding populations of pests and diseases

Climate change will affect agricultural productivity and peoplewill likely respond to it by adjusting their farming techniques and theirlivelihood strategies We are only now beginning to understand thedegree of adaptation but evidence shows that people in the most af-fected areas have already started to change the way they farm and gen-erate their livelihoods In the short-run farmers adapt by changing cropmixes using water conservation measures and adopting risk-manage-ment techniques to lessen the consequences of more frequent droughtsThey adjust their livelihood strategies to include more non-climate-affected sources of income For example they work off the farm andchange their migration strategies

Over the longer run and as the change in climate increases moreoptions are needed to create opportunities to adapt Governments mayinvest in and farmers may adopt technologies and production tech-niques that reduce the impact of climate change Agricultural researchsystems can respond by producing shorter-season seed varieties thatare more tolerant of drought rice varieties that are more tolerant ofsalinity and other germplasm that is resistant to environmental stressEnhanced means of managing soil moisture can be identified throughresearch Farmers may adopt conservation farming techniques thatminimize disruption of the soils and lower exposure to rainfall short-ages Conserving water is a particular concern because it is estimatedthat 70 percent of freshwater use is currently devoted to agriculture

It is important to recognize that if the projections of the scientificcommunity are correct the world is in a race against time Adaptationwill mitigate some of the ill effects of climate change and some areaswill likely prosper following adaptation But adaptation will not ame-liorate the ill effects of climate change in the most adversely affectedregions In low-lying coastal regions and some of the more arid areasthe imperative is to attain improvements in well being over the short-to medium-term Over the long haul climate change is likely to alter


170


the environment to such a degree that no adjustments in livelihood strat-egies will suffice

Chemical PollutionMisuse of chemical pesticides and fertilizers has contaminated the landand water in many developing countries damaging the health of pro-ducers and consumers stimulating the emergence of pests resistant topesticides destroying the natural enemies of pests and reducing fishpopulations or rendering them unsafe for human consumption Acutepesticide poisonings are common and little is known about potentiallong-term health effects Few developing countries have establishedeffective pesticide regulatory and enforcement systems

Hundreds of pests have become resistant to one or more chemi-cals and the number is growing Fertilizer runoff increases nitrate lev-els in ponds and canals reducing oxygen levels and killing fish Exces-sive pesticide levels often destroy fish in irrigated rice paddies

Heavy use of pesticides and fertilizers tends not to hurt agricul-tural production in the short-run However as resistance to pesticidesbuilds up and predators are reduced future production potentials arejeopardized And society bears the cost of off-farm pollution

CAUSES of ENVIRONMENTAL PROBLEMSEnvironmental degradation can result from physical economic andinstitutional factors Many environmental problems are interrelated forexample deforestation erosion and silting of rivers and reservoirs areall linked Natural resource degradation usually has direct and indirectcauses For example desertification can directly result from overgraz-ing and poor cropping practices but indirectly result from poverty andpopulation growth Physical or technical causes of natural resourcedegradation are often the most visible Land clearing for timber fuelwood cattle ranching or farming causes deforestation Deforestationresults in loss of biodiversity loss of soil and diminished soil fertilitysince soil uncovered in tropical forests loses its fertility quickly If theforest is burned carbon dioxide enters the atmosphere If the area issemi-arid loss of forests can contribute to desertification Desertifica-tion can also result from overgrazing which itself is caused by too manycattle eating grass in an area subject to dry spells or droughts Intensivecropping in semi-arid areas contributes to desertification Many otherexamples of physical causes of natural resource degradation can be citedSalinity and waterlogging result from poorly managed irrigation sys-tems Chemical pollution results from excessive fertilizer and pesticideuse Silting of rivers and tidal surges during storms cause flooding

171

The challenge in solving such problems however is in understand-ing what factors affect individual and group decisions about naturalresource use These factors are both economic and determined by insti-tutions Institutions include the legal system cultural norms marketstructures and other rules of behavior affecting decision-making in-centives Once we understand how economic and institutional factorsaffect decisions about resource use we can begin to formulate strate-gies to address the most serious environmental problems

Economic Causes of Natural Resource DegradationAn important economic cause of natural resource degradation occurswhen markets fail to reflect the true value of resources or the true costsof actions Market failures emerge due to the presence of externalitieshigh costs of information and in the provision of public goods An ex-ternality is created when decision-makers impose costs on others with-out considering these costs when making the decision Farmers for ex-ample may create off-farm costs associated with soil erosion or pesti-cide pollution without considering these external costs (see Box 9-1)Furthermore a lack of information about or concern for environmentaldamage creates costs that lead to environmentally destructive behav-ior For example the farmer may be unaware that his farming practicesare damaging long-term productivity or that cost-effective practices arereadily available to improve the situation In such cases the market isfailing to adequately transmit information to the farmer Environmen-tal quality is a public good which means it is very costly to prohibitsomeone from benefiting from it and one personrsquos benefiting from itdoes not preclude another from benefiting from it It is well known thatthe free market is associated with an undersupply of public goods Allthese forms of market failure contribute to natural resource problems

Poverty is another economic condition associated with environ-mental degradation Poverty drives people to farm marginal lands in-tensively to seek fuel wood and to follow other agricultural practicesthat produce food at the potential sacrifice of future production Asdiscussed in Chapter 4 poverty reinforces population growth which isa major contributor to deforestation overgrazing and farming on steepslopes drylands and flood plains

The concern of the poor for the present implying heavy discount-ing of future costs and benefits is matched by the needs of govern-ments in developing countries to deal with internal and external debtproblems Indeed the existence of debt problems in many countriesreflects previous decisions to spend on current consumption rather thansave for the future Governments follow policies that encourage natural


172


resource-based exports to pay off debts and import capital goods Theylack the financial resources to address environmental problems

Countries implementing economic development programs usu-ally find high rates of return to many types of capital investment Thehigh interest rates often characteristic of these cases encourage currentconsumption and may place demands on natural resources Interestrates in developing countries are also influenced by interest rates inmajor developed countries due to linkages through international fi-nancial markets

Institutional Causes of Natural Resource DegradationA major cause of environmental degradation is institutional failure bothprivate and public Existing social structures and local customs maynot be adequate to preserve the environment as economic developmentproceeds Or environmentally constructive social structures and cus-toms may be destroyed by national policies or by increases in the costsof transactions and of acting collectively In some cases inadequate in-stitutions are the legacy of colonial interference or the result of morerecent international influence

Market institutions determine how well markets work and as notedabove market failures are a chief cause of environmental degradationThese market failures mean that the market is not transmitting the truevalue of the resource to the decision maker Market failures can be dueto inadequately defined property rights costs associated with monitor-ing and enforcing property rights and weak enforcement institutionsIt may be unclear for example whether the farmer has the right to pol-lute the water or whether downstream users have the right to cleanwater Even if these rights are legally clear they may be difficult orimpossible to enforce Thus weak property rights contribute to themarket failure

Inadequate property rights in forest pastures and ground andsurface waters can undermine private or local collective incentives tomanage resources on a sustainable basis In some areas the land or wa-ter resource was traditionally held in common Under a common-property regime people in the village or community had access to usethe resources but did not own or rent them privately When the localsociety could maintain authority over the resource or when popula-tion pressures were such that the resource was in abundant supplythen this common property could be managed in a socially optimalmanner However as population increases and as national policies usurplocal authority breaking down traditions and customs incentives forresource preservation and traditional means of controlling access often

173

are destroyed If one person does not cut down the tree for fuel woodanother will Or if one personrsquos goat does not eat the blade of grassanother personrsquos goat will Or if one person does not use the water orcatch the fish another will The result is that incentives exist for eachindividual to overexploit resources because otherwise someone else will

Common-property regimes do not necessarily cause resource mis-management if local institutions create incentives to efficiently managethe resource In many areas of Africa common-property institutionswere said to cause overgrazing on rangelands However attempts bythe government to replace these institutions with private ownership

BOX 9-1

EXTERNALITIES and PRIVATE DECISIONSOne market failure associated with environmental degradation is the diver-

gence between private and social costs of actions This divergence is

caused by the presence of external costs An external cost exists when an

activity by one agent causes loss of welfare to another agent and the loss

is not considered by the author The effect of externalities on private deci-

sion-making is illustrated in the figure below

A farmer who cannot influence market prices will produce a good up

until the point where the private marginal cost of its production (MCp ) equals

the market price In the figure this point is shown where MCp = P

t and Q

p

units are produced An external cost is represented by the social marginal

cost curve (MCs) which exceeds the private cost curve From societyrsquos

point of view the desirable production level is Qs (where MC

s = P

t) Thus

the externality leads to more production of the good than is socially desir-

able


174


schemes were largely counterproductive contributing to more rapiddegradation of resources and leading to increased economic inequal-ity Efficient indigenous resource management institutions were re-placed by less effective but more modern institutions Common-property institutions can certainly be a viable means of managingresources11

In areas of frontier colonization poorly defined and inadequatelyenforced property rights can create incentives for over-exploitation ofnatural resources For example the Peten Region of northern Guate-mala is currently undergoing high rates of deforestation particularlyin its western extremities In the western Peten the Guatemalan gov-ernment established the Laguna de Tigre national park in 1990 It washoped that a national park would slow settlement and lead to conser-vation of the forest in its original state However the government doesnot have the resources to monitor and discourage settlement on theseisolated public lands and a weak legal system prevents enforcement oflaws prohibiting illegal settlement As a result illegal settlers are defor-esting the lands while population pressures are growing water is in-creasingly scarce and ecological integrity has been destroyed

Public policies are another major institutional cause of natural re-source degradation Agricultural pricing policies input subsidies andland use policies often discourage sustainable resource use Govern-ments in developing countries intervene in agricultural markets to keepfood prices artificially low These interventions cause land to be under-valued reducing incentives for conservation And low incomes makethe investment required for sustainable output difficult On the otherhand higher agricultural prices raise the value of land and as a resultcan contribute to increased deforestation12 These competing impactsof agricultural prices on the environment make it important that policyimpacts be explored as a part of government decision-making

Governments frequently subsidize fertilizer and pesticides in partto compensate for keeping farm product prices low If fertilizer or pes-ticide use causes an externality then subsidies because they increaseinput use will increase the level of the externality Subsidies may beindirect in the form of roads or export subsidies that encourage defor-estation Road access is strongly associated with deforestation in all

11 See Daniel W Bromley ed Making the Commons Work (San Francisco Institute forContemporary Studies Press 1992)

12 See Arild Angelsen and David Kaimowitz ldquoRethinking the Causes of DeforestationLessons from Economic Modelsrdquo The Woirld Bank Research Observer vol 14 no 1(February 1999) pp 73ndash98

175

regions of the world Subsidized irrigation water can encourage itswasteful use

Land tenure and land use policies may cause exploitation of agri-cultural and forest lands with little regard for future productivity ef-fects Short leases for example create incentives to mine the resourcebase for all it is worth in the short-run And as just noted it is an errorto think that local incentive problems can be entirely corrected by na-tional policies Bromley and Chapagain point out that in Nepal na-tional policies on forests have destroyed local conservation practicesand incentives13 A common policy in Latin America has been to re-quire that in colonized areas land needs to be developed which usu-ally means cleared of trees prior to receiving title to the land A largepart of the deforestation in the Brazilian Amazon is associated withthese types of titling rules

Land use patterns are sometimes affected by colonial heritage orother international influences In parts of Latin America and the Carib-bean large sugarcane coffee and banana plantations or even cattleranches are found in the fertile valleys and plains while small peasantfarms intensively producing food crops dot the eroding hillsides Thelow labor intensity of production in the valleys depresses job opportu-nities and forces the poor to rely on fragile lands to earn incomes Thesepatterns are the legacy of colonialism Colonial powers in Africa changedcropping system to cash cropping in areas where cash cropping couldnot be supported by the natural resource base Peasants have been forcedonto marginal lands reducing lands for nomads Traditional nomadictrading patterns were also disrupted

These and other institutional policies have contributed to naturalresource problems as they exist today Institutional change is thereforeone of the potential solutions to these problems as described below

POTENTIAL SOLUTIONS to NATURAL RESOURCE

PROBLEMSSolutions to environmental problems contain technical economic andinstitutional dimensions Technical solutions are needed to provide thephysical means of remedying natural resource degradation while eco-nomic and institutional solutions provide the incentives for behavioralchange

13 See Daniel W Bromley and Devendra P Chapagain ldquoThe Village Against the Cen-ter Resource Depletion in South Asiardquo American Journal of Agricultural Economicsvol 68 (December 1984) pp 868ndash73


176


Technical Solutions to Natural Resource ProblemsA variety of technical solutions are available to solve deforestation ero-sion desertification flooding salinity chemical pollution and otherenvironmental problems Where technical solutions are lacking gov-ernment-sponsored research and education can develop new naturalresource-conserving practices and facilitate their adoption

Windbreaks contour plowing mulching legume fallow cropsalley cropping deferred grazing rotational grazing well-distributedwatering places and re-vegetation or reforestation are all examples ofphysical practices that could help reduce soil erosion silting and de-sertification Solar pumps biogas generators and more efficient cook-ing stoves can provide or save energy thereby reducing fuel-wood con-sumption deforestation and desertification Embankments can provideprotection from flooding for limited areas and dams can be built onrivers to control water flows

Irrigation canals can be better lined to reduce waterlogging andsalinity and conserve water resources Integrated pest management tech-niques can be developed that involve increased biological and culturalcontrol of pests to reduce pesticide pollution Germplasm banks can beused and conservation reserves established to preserve endangered plantspecies

These are just a few of the potential technical or physical solutionsto environmental problems In many cases these technical solutions arealready known but in others additional research is essential for suc-cess In the pest management area for example much work still needsto be completed on biological controls for major pests in developingcountries Integrated pest management (IPM) is a family of pest man-agement techniques that lowers dependence on toxic pesticides in manycountries these techniques are technically feasible but have not beenwidely spread to farmers due to limited extension and agricultural out-reach services in many developing countries14

The availability of technical solutions to natural resource prob-lems is essential for reducing environmental degradation In almost allcases however these solutions must he combined with economic andinstitutional changes that create incentives for behavioral change With-out these incentives it is unlikely that the technologies will be widelyadopted since they usually imply increased costs to their users

14 See George W Norton E A Heinrichs Gregory C Luther and Michael E Irwineds Globalizing Integrated Pest Management A Participatory Research Process (AmesIowa Blackwell Publishing 2004)

177

A brush fence in Kenya being used to facilitate rotational grazing

Economic and Institutional Solutions to Natural Resource

DegradationInternational and natural agricultural research systems can generatenew technologies that increase food production and incomes As in-comes grow population pressures are reduced and the demand forenvironmental protection increases New institutions may be formed(or existing institutions may evolve) in response to this demand andincentives for resource conservation are created

As countries develop the major source of growth is not the natu-ral resource base but new knowledge (see Chapter 5) This knowledgecan to some extent substitute for natural resources and is less subjectto the diminishing returns associated with more intensive use of natu-ral resources Increases in agricultural productivity resulting from thenew knowledge or technologies not only raise incomes but also thevalue of human time As the value of human time increases popula-tion growth rates decline with favorable implications for natural re-source problems

The best immediate way to solve natural resource problems ishowever through reforms of economic policy or institutional changesthat reduce market failures Reducing the discrimination against agri-culture in pricing policies should help Low returns to agriculture de-press farmland prices and the returns to investments in land conser-vancy practices as noted earlier Low returns reduce the demand for


178


Spraying pesticides

in the Philippines

labor and therefore labor income If returns to agriculture were raisedsubsidies on inputs such as agro-chemicals could be eliminated How-ever increased returns to agriculture also put additional pressure onforest resources so institutional mechanisms to reduce deforestationmust accompany changes in agricultural pricing policies

Several means are available for addressing the underlying marketfailures associated with environmental degradations Subsidies andtaxes can be used as lsquolsquocarrotsrsquorsquo or lsquolsquosticksrsquorsquo to reduce externalities or off-site effects associated with agricultural and forestry use An example ofa conservation subsidy (ie a ldquocarrotrsquorsquo) might be a program in whichthe government shares the cost of building terraces windshybreaks andfences or of planting trees In some cases local workers can be paid in-kind with food from internationally supplied food aid An example ofa ldquostickrsquorsquo is a sales tax on chemical pesticides Such subsidies are de-signed to ldquointernalizerdquo the externality so that the economic actor con-siders the social costs associated with his or her decisions

Institutional change that creates secure property rights will helpaddress some problems of environmental degradation Ownership ofland titles increases the returns to long-term investments in land On

179

BOX 9-2

INSTITUTIONS and DEFORESTATION

in the BRAZILIAN AMAZONBrazil contains 35 million square kilometers of tropical forests some 30

percent of the worldrsquos total Most of the forests are found in the Brazilian

Amazon Basin Deforestation of this rich reserve of plant and animal spe-

cies has increased in recent years raising concerns for its effects on at-

mospheric carbon levels and on the maintenance of global biodiversity

The Brazilian government made a conscious decision in the 1960s to

develop the Amazon as a means of relieving population pressures provid-

ing territorial security and exploiting the regionrsquos wealth Ambitious road-

building programs other infrastructure development agricultural coloniza-

tion projects and policies providing tax and other incentives for agricultural

and industrial development were begun These projects had the effect of

opening access to the Amazon and promoting environmentally unsound

development

Tax exemptions and cheap credit spurred the creation of large-scale

livestock projects whose economic and environmental suitability to the

region was questionable The National Integration Program established a

network of villages towns and cities and cleared lots for in-migrating set-

tlers The plans for these settlements were made without regard for soil

fertility or agricultural potential and the cleared forest lands were quickly

eroded and otherwise degraded

Environmentally destructive settlement practices are promoted through-

out the Amazon by the Brazilian governmentrsquos practice of awarding land

titles only for deforested lands A migrant in either an official settlement

project or an invaded area can obtain title to the land simply by clearing the

forest Once the title is granted the migrant can sell or transfer it to some-

one else and proceed to clear additional lands Calculations show that it is

more profitable to clear land plant subsistence crops for two years and

then sell and move than it is to remain as a permanent settler

Clearly the rate of deforestation in Amazonia is directly influenced by

government policies and other institutional arrangements It is just as clear

that policy reform and institutional adjustments can slow or even reverse

this process

Source Dennis J Mahar ldquoDeforestation in Brazilrsquos Amazon Region Magnitude

Rate and Causesrdquo chapter 7 in Gunter Schramm and Jeremy J Warford eds

Environmental Management and Economic Development (Baltimore Johns

Hopkins University Press 1989)


180


the other hand the removal of institutions that guarantee land titlesonly if forests are cleared will help stop deforestation (see Box 9-2) Theprovision of property rights does not necessarily imply privatizationThere are numerous examples of common-property regimes managedin environmentally sound fashions and it is only when populationgrowth or other changes put pressure on group management that theeffectiveness of the management is diminished Institutional changesthat reinforce these common-property management schemes may bemore effective than privatization

Many successful examples can be found of assigning propertyrights and creating markets for environmental quality In eastern PetenGuatemala community organizations were granted contracts for sus-tainable use of forest resources These organizations because they havethe rights to the natural resources control access to the forest and ldquopo-licerdquo extractive activities such as timber harvest by outsiders As a re-sult the eastern Peten is still heavily forested especially in comparisonto the west where inadequate property rights and high enforcementcosts have contributed to heavy deforestation (see above) In Zimba-bwe local villagers were given rights to harvest elephants and sell theserights to foreign hunters The money from these sales is kept and usedfor development purposes in the villages The villagers now see theelephants as a valuable resource and protect them from poachers As aresult elephant populations are growing rapidly in areas where 15 yearsago the elephant was practically extinct

Certification is a process whereby international markets recognizeand reward products that are sustainably produced For example woodin the eastern Peten is harvested in an environmentally sustainablemanner and is certified as ldquogreenrdquo by Smartwood an international or-ganization The wood is favorably received in international marketsand receives a price premium Other products such as coffee cocoaand bananas can also be certified as being produced in an environmen-tally and socially sustainable manner

Certification is just one element of an emerging family of mecha-nisms to create markets for environmental goods Payments for envi-ronmental services (PES) are schemes whereby demanders of environ-mental goods are brought together with suppliers so that both benefitA global example is the Clean Development Mechanism (CDM) estab-lished by an international environmental agreement called the KyotoProtocol which allows countries that are committed to greenhouse gasemission reductions to pay for carbon emmission-reducing projects suchas reforestation in developing countries as an alternative to more ex-pensive emission reductions in their own country Local examples of

181

PES schemes are found throughout Central America where water-using towns and cities pay upstream farmers to adopt practices thatcreate less damage to water quality These schemes create a market forthe environmental good and induce producers to consider the value ofthe resource when making decisions

Regulation is an alternative institutional mechanism for influenc-ing environmental behavior Although difficult to enforce regulationcan play a role when combined with other economic incentives Forexample burning of crop stubble farming of particularly erosive landsor logging in certain areas can be prohibited in conjunction with a pro-gram that also provides other government economic benefits to farm-ers or forest owners Families can be restricted from settling in flood-prone areas perhaps with the provision of funds for resettlement Ex-perience shows that without incentives for changing behavior regula-tions tend to be ineffective since enforcement is costly and there areprivate incentives to cheat

Physical restrictions on grazing land reform programs that dis-tribute land to small farmers revised leasing arrangements and manyother government-sponsored institutional changes can improve natu-ral resource sustainability if certain principles are followed First thereis a need for careful assessment of the economic benefits and costs in-cluding externalities resulting from the policies Second local input isneeded in the decision-making process Third compensation often isrequired for any losers That society as a whole will be better off follow-ing these institutional changes is not enough Losers may need to becompensated or they may oppose any change PES schemes can be ex-ploited in such instances and those who benefit from the change canldquobriberdquo producers to adopt it

These three principles hold for institutional changes at various lev-els mdash local regional national and international mdash and they are notalways easy to apply If developed countries want developing coun-tries to reduce carbon-dioxide emissions associated with forest burn-ing developed countries must be willing to foot part of the bill TheKyoto Protocol for climate change adopted in 1997 reflected this needfor mutual sacrifice to limit greenhouse gas emissions It was the prod-uct of several years of intense negotiations and reflected developing-country energy needs for economic development The agreement al-though not ratified by the US government entered into force in early2005 and sparked creation of markets for trading emission allowancesunder the CDM New markets for formerly unvalued environmental goods(such as carbon sequestration) represent opportunities for producers indeveloping countries The challenge is to overcome institutional


182


barriers and information and administrative costs at the local level PESschemes require careful monitoring to ensure that the land users areadhering to the agreements and a well-functioning legal system to ad-judicate claims

Similarly governments need to consider what factors affect indi-vidual decisions Solutions to environmental problems do not justemerge from changes in the legal environment If governments wantdeforestation reduced they cannot just pass a national decree Theymust involve local decision makers in designing an institutional solu-tion that provides individual incentives for appropriate behavior Some-one may need to estimate the costs and benefits associated with alter-native institutional mechanisms Enforcement mechanisms need to befair and have teeth

In many cases the presence of transactions costs and collectiveaction has created institutional environments that are destructive to thenatural resource base Imperfect information corrupt government offi-cials and the absence of new institutional arrangements to replace pre-vious social and cultural norms that constrained behavior harmful tothe groups are serious problems Improvements in information flowsand creation of markets to reflect environmental values are essential ifsuch corrupt behavior and reductions in other transactions costs are tobe reduced Education also becomes vitally important Thus focusingon communications infrastructure and human-capital development aretwo keys to environmental improvement

SUMMARYSound environmental management is essential for sustained agricul-tural and economic development Yet environmental degradation isevident throughout the developing world Soil erosion silting of riversand reservoirs flooding overgrazing poor cropping practices deserti-fication salinity and waterlogging deforestation energy depletion lossof biodiversity and chemical pollution have become major problemsPoverty high rates of return to capital debt problems rapid popula-tion growth and misguided public policies conspire against solutionsEnvironmental problems are interrelated and understanding theircauses requires sorting out complex physical economic and institu-tional linkages Technical solutions are needed for each of these prob-lems but economic and institutional changes must provide the incen-tives for behavioral change As incomes grow population pressuresare reduced and the demand for environmental protection increasesEconomic development means more resources in the long run for address-ing environmental problems Changes in taxes subsidies regulations

183

and other policies can influence local incentives for conservation Bal-ancing benefits with costs obtaining local input in the decision-making process and compensating losers are needed for effective solu-tions to local and global environmental problems Because transactionscosts must be reduced for natural resource conservation to occur infor-mation flows must be improved and human capital must be developed

IMPORTANT TERMS and CONCEPTSBiodiversity Greenhouse effectChemical pollution Institutional changeClimate change Market FailureCommon property Natural resource managementDeforestation OvergrazingDesertification Payments for Environmental ServicesDiscounting of costs and benefits RegulationsGlobal warming Salinity and waterloggingEnvironmental degradation Soil erosionExternalities Subsidies and taxesFlooding Sustainable resource use

Looking AheadIn this chapter we examined the nature and causes of environmentalproblems in developing countries Potential technical economic andinstitutional solutions were considered so that agricultural develop-ment can be sustainable In the next major section of the book we con-sider what it takes to improve agriculture more generally from both atechnical and an institutional perspective to contribute to sustainabledevelopment However first in Chapter 10 we consider the how hu-man resources including family structure and gender issues influencestandards of living in developing countries

OUESTIONS for DISCUSSION1 What are the major natural resource problems facing developing

countries2 Are the poorest countries the most vulnerable to environmental

degradation Why or why not3 How are flooding and soil erosion related4 What is desertification5 How are waterlogging and salinity problems interrelated6 How are deforestation and energy problems interrelated7 What are the major technical or physical causes of natural resource

degradation


184

8 What common market failures lead to environmental degradationin developing countries

9 What is a public good Why might the free market undersupply apublic good

10 How is climate change related to market failure What efforts toaddress the market failure might have major impacts on carbon emis-sions

11 What are some of the technological solutions to natural resourceproblems

12 What are some of the economic and institutional solutions to natu-ral resource problems

13 How does a PES scheme help correct for market failure14 What are three key principles that must hold if institutional changes

are to successfully solve environmental problems15 Why are reductions in transactions costs important for sustainable

natural resource use

RECOMMENDED READINGSMarkandaya Anil Patrice Harou Lorenzo Giovanni Bellu and Vito

Cistulli Environmental Economics for Sustainable Growth (NorthhamptonMass Edward Elgar 2002)

Pearce David W and R Kerry Turner Economics of Natural Resources andthe Environment (Baltimore Johns Hopkins University Press 1990) pp61ndash9 342ndash60

Schramm Gunter and Jeremy J Warford eds Environmental Managementand Economic Development (Baltimore Johns Hopkins University Press1989)

Tietenberg T H ldquoThe Poverty Connection to Environmental PolicyrdquoChallenge September-October 1990 pp 26ndash32

Tietenberg T H and H Folmer eds The International Yearbook of Envi-ronmental and Resource Economics 20042005 (Cheltenham UK EdwardElgar 2004)

World Commission on Environment and Development Our Common Fu-ture (New York Oxford University Press 1987)


185

CHAPTER 10

Human Resources Family

Structure and Gender Roles

ldquoWomen account for 70 to 80 percent of household food production

in Sub-Saharan Africa 65 percent in Asia and 45 percent in Latin

America and the Caribbean They achieve this (production) despite

unequal access to land to inputs such as improved seeds and fer-

tilizer and to informationrdquo Lynn R Brown et al 20011

THIS CHAPTER1 Discusses the role of human resources in agricultural and economic

development2 Examines differences in family structure and gender roles in farm

households in developing countries3 Considers determinants of gender roles in farm households

Poor agricultural households in developing countries generallyhave few assets Some own small parcels of land but all householdshave human assets The productivity of human assets helps determineprospects for accumulation of other assets and increased income overtime Productivity of labor can be improved through investments ineducation health care nutrition and acquisition of skills Decisionsabout investments in education how household labor is deployed andabout the size and structure of families are made by families Thesedecisions depend on policy-based and other incentive structures cul-tural norms and gender roles such decisions have major impacts on

1 Lynn R Brown Hilary Feldstein Lawrence Haddad Christina Pentildea and AgnesQuisumbing Chapter 32 p 205 in Per Pinstrup-Andersen and Rajul Pandya-Lorcheds The Unfinished Agenda Perspectives on Overcoming Hunger Poverty and Envi-ronmental Degradation (International Food Policy Research Institute WashingtonDC 2001)

186


productivity asset accumulation and household well-being In somesocieties for example girls are less likely to attend school than are boysin others women are less likely to receive health care and have shorterlife expectancies than do men We examine the role and determinantsof investments in education how human resources affect householdwell-being and the roles of men women and children in making deci-sions and participating in household activities

ROLE of EDUCATIONThe overall productivity of the economy depends on the quantity andquality of inputs into production Better education health care andacquisition of skills are clear means of improving labor productivityEvidence continually shows that better-educated individuals earn higherincomes and that these higher incomes reflect greater productivity2

Education can be an important contributor to improved agriculturalproductivity underutilization and low productivity of human resourcesin agriculture is a serious problem in many developing countries Bet-ter-educated farmers are more able to adopt new technologies are bet-ter able to understand price and market information and have moreaccess to credit and other forms of capital Better-educated care giverscan prepare more nutritional meals reduce diseases through improve-ments in basic sanitary practices and assist their children in learning ata younger age Countries that fail to improve the skills and knowledgeof farmers and their families find it difficult to develop anything else

Objectives and Benefits of EducationRural education is an investment in people that has as its objectives (1)improving agricultural productivity and efficiency (2) preparing chil-dren for non-farm occupations if they have to leave farming and (3)enhancing the general quality of life by enabling better decision mak-ing Education may help motivate farmers toward change teach im-proved decision-making and farm-management methods provide farm-ers with technical and practical information and lead to better market-ing of higher-valued farm outputs Agricultural extension is comple-mentary to other sources of information because it speeds the transferof knowledge about new technologies and other research results (seeChapter 12 for more details on extension systems)

2 Paul Glewwe ldquoSchools and Skills in Developing Countries Education Policies andSocioeconomic Outcomesrdquo Journal of Economic Literature vol 40 (2) June 2002 pp436ndash82

187

A country with a literate people in rural areas will have better in-formation flows than one without due simply to better communica-tions Communications help reduce the transactions costs that hold backdevelopment they provide information to improve the timing of pro-ductive activities and lower risk Education helps farmers acquire un-derstand and sort out technical institutional and market information

The result is that investments in education yield returns not justfor the farmer but for society as a whole mdash educational attainment is apublic good As education levels increase in a village all villagers tendto gain from more productive neighbors better information flows andmore experimentation and innovation Because it results in a more pro-ductive and efficient agriculture and in a more productive labor forcefor non-farm employment and because of its public good characteris-tics most countries finance education particularly at the primary andsecondary levels TW Schultz has argued that education helps peopleto deal with economic disequilibria Thus as agriculture in a countryshifts from a traditional to a more dynamic science-based mode thevalue of education increases

Education is important not just for farmers and for children whowill continue farming but for those who leave agriculture Educationfor non-farm jobs is particularly important for agricultural develop-ment if the youth acquire jobs as agricultural extension agents manag-ers of cooperatives and other business firms supplying inputs to farm-ers or marketing their products agricultural scientists or governmentofficials who administer agricultural programs Educated children whodo not choose agricultural occupations often send remittances backhome these remittances are an important source of investment capitalfor farmers It is important to understand that education represents aninvestment in human beings and that these investments reap returnsboth inside and outside agriculture If a child of a farmer becomes edu-cated and decides to leave agriculture and migrate to a city for a jobthe individual and society as a whole both gain from the investment

Education of girls can be particularly important for developmentAs women become more educated they live longer and healthier livesthe value of their time increases the health and nutrition of family mem-bers improves and total fertility declines3 They have fewer healthierand better-educated children They also earn more in farming and off

3 See T Paul Schultz ldquoWomenrsquos Role in the Agricultural Householdrdquo Chapter 8 inBruce L Gardner and Gordon C Rausser eds Handbook of Agricultural Economics(New York Elsevier 2001)


188


the farm4 Payoffs to womenrsquos education are found in the short-runthrough improved productivity and long-run payoffs include reduc-tions in intergenerational poverty Although progress has been madein improving girlsrsquo access to schooling gaps remain particularly in thepoorest countries where girls are only 80 percent as likely as boys toattend school

Major Types of EducationThree basic types of education exist (1) primary and secondary educa-tion (2) higher education and (3) adult education Most countries havea goal of almost universal primary education and eventually second-ary education as well Primary education provides basic literary andcomputational skills Secondary education provides training for stu-dents going on to higher education and technical education for thosewho seek immediate employment

The need for higher education related to agriculture depends inpart on the growth of employment opportunities in agricultural researchextension agribusiness and government Undergraduate agriculturalprograms have expanded in many African Asian and Latin Americancountries in recent years Some of these colleges such as the Pan-American Agricultural School in Zamorano Honduras require a mixof academic and practical training and draw students from several coun-tries

Postgraduate programs also have expanded in several larger de-veloping countries such as India the Philippines Brazil and MexicoThe quality of these programs is variable but the programs have a bet-ter track record of their students returning home after completing theirdegrees than do graduate programs in developed countries Foreignacademic training in developed countries also has the disadvantage thatthe training and research may be less relevant to the home country ofthe student

In adult education often called extension education in agriculturefarmers are the primary clientele and the programs are mostly orientedtoward production problems facing farmers Extension accelerates thedissemination of research results to farmers and in some cases helpstransmit farmersrsquo problems back to researchers Extension workers pro-vide training for farmers on a variety of subjects and must have techni-cal competence economic competence farming competence and com-munication skills Thus extension workers require extensive training

4 See World Bank Engendering Development (New York Oxford University Press 2001)

189

and retraining to maintain their credibility with farmers As informa-tion requirements for farming increase adult literacy is gaining impor-tance for understanding agricultural innovations Technology andextension information are increasingly being transmitted through elec-tronic means so basic computer literacy is also important Basic adultliteracy and the ability to absorb new messages about productivity-improving technologies are highly complementary so that over timeadult education in rural areas needs to be broadened to include basicskills

Issues in Education in Developing CountriesBecause education is critical for a countryrsquos development prospectsseveral inter-related issues must be addressed by education policymakers These issues include finance questions such as measures torecover costs in K-12 education use of resources to retain studentsthrough higher grade levels versus expanding basic coverage to alldecisions about educational curricula such as providing technical ver-sus more general education and gender and economic barriers to par-ticipation in basic education Cost recovery measures such as schoolfees were introduced in many developing countries as part of struc-tural adjustment programs in the 1980s They are based on the idea thatsince some of the benefits of education are private and are captured bythe individual the beneficiary (the student or his or her family) shouldbear some of the costs They also broaden the financial base of supportfor the educational system and provide resources to cash-poor localeducational districts However increasing evidence shows that suchfees represent major barriers to participation in education especially tothe poorest and countries that have abolished fees have seen remark-able growth in school participation The World Bank which was a strongproponent of cost-recovery in basic education now has a blanket policyopposing such fees Elimination of fees will help reduce gender andeconomic barriers to participation in education

Developing countries face choices about the design of their educa-tional curricula in rural areas While most schools provide basicliteracy and mathematics choices need to be made about technical con-tent The experience has been mixed relative to agricultural educationat the K-12 level in developing countries While some argue that suchschools need to provide useful skills and thus should focus on trainingin agriculture evidence shows that design of an agricultural curricu-lum is difficult and costly Often training methods do not correspondto conditions faced by poor farmers and time spent in such trainingreduces time available for other subjects When rural schools focus too


190


Female education is as important as male education

yet it is often neglected

closely on rural-specific skills graduates face disadvantages when seek-ing higher education or finding work in urban areas

FAMILY STRUCTURE and GENDER ROLESFamily structures vary around the world and that variation impliesdifferences in specific roles played by individual family members inhousehold affairs in agricultural production and marketing and in in-come generation in and out of agriculture For example in many WestAfrican countries families live in compound households that includemore than one generation and individual family members are assignedspecific parcels of land to farm In much of Latin America the basichousehold is a nuclear family with parents and children and familymembers have specific responsibilities within the household and infarming In many parts of Asia nuclear families predominate and insome cases family members work side by side in fields but in othersmales and females undertake different tasks Regardless of the regionwomen have key roles to play in farming systems Women are involvednot only in household chores and child rearing but are a major sourceof labor for food production and account for a large proportion of eco-nomic activity

191

Gender RolesThe term ldquogenderrdquo refers to non-biological differences between womenand men and roles in farming and household decisions in developingcountries differ by gender With the notable exception of strongly Is-lamic societies women play two major roles in the rural areas of mostdeveloping countries First they have household responsibilities forchild rearing food preparation collecting water and firewood and otherchores Second they are paid or unpaid workers in agriculture or offthe farm They produce process preserve and prepare food They workin the fields they tend livestock they thresh grain and they carry pro-duce to market In many areas women manage the affairs of the house-hold and the farm They sell their labor to other farms and sometimesmigrate to plantations Involvement in farm production may be sea-sonal particularly in Asia where in many countries women assumemajor responsibilities for weeding and harvesting both on their ownfarms and as paid labor on other farms Women also work in smallindustries and in the informal sector producing goods and services forsales locally or beyond

Women are important to agriculture in most areas of the worldbut they play the largest role in farming in Africa In many countriesnearly all the tasks connected with food production are left to womenMen may tend livestock or produce cash crops but food crops are gen-erally the purview of women In Malawi for example over two-thirds

Women threshing wheat in Nepal


192


of those working full time in farming are women5 In some areas ofAfrica where men migrate to work elsewhere the entire administrationof the household is left to women (Box 10-1) Similar cases exist in theCentral American highlands where men migrate seasonally to partici-pate in coffee harvests and to coastal plantations Households headedby women make up 20 to 25 percent of rural households in developingcountries excluding China and Islamic societies6 In Latin Americawomen care for animals particularly chickens and pigs while tendinggarden vegetables and other food crops In sugar- and fruit-producingareas especially in the Caribbean women work as cash laborers onplantations and provide a substantial proportion of household incomeIn Asia many examples of female farming systems are found In Nepal itis estimated that women on subsistence farms produce 50 percent ofhousehold income men and children produce 44 and 6 percent respec-tively7

Even though they tend to work much longer days than men thetrue extent of involvement of women in agriculturally related activitiesis often underestimated and misunderstood by policy makers Whensurveys are taken men frequently respond as heads of households andboth men and women usually describe the womanrsquos principal occupa-tion as housewife In many areas women do not view themselves asldquofarmersrdquo even when they work long hours on the farm and have largeinfluences over farming-related decisions8 (see Box 10-2) They are thencounted in the survey as economically inactive This ldquoinvisibilityrdquo offemale employment has led to policies and programs that ignore womenand sometimes adversely affect them

One impact of the ldquoinvisibilityrdquo of women has been to lower theirstatus Within the household this lower status may mean less power tomake decisions less food fewer heath-related investments in womenand a heavier work and disease burden In times of household crisiswomen and female children may bear a heavier burden in southern

5 Janice Juggins ldquoGender-Related Impacts and the Work of the International Agricul-tural Research centersrdquo Consultative Group for International Agricultural Research(CGIAR) Study Paper Number 17 World Bank Washington DC 1986

6 Juggins ldquoGender-Related Impacts helliprdquo7 Meena Acharya and Lynn Bennett ldquoWomen and the Subsistence Sector Economic

Participation and Household Decision Making in Nepalrdquo World Bank Staff Work-ing Paper Number 526 Washington DC World Bank 1982

8 Sarah Hamilton Keith Moore Colette Harris Mark Erbaugh Irene Tanzo CarolynSachs and Linda Asturias de Barros ldquoGender and IPMrdquo Chapter 14 in GlobalizingIntegrated Pest Management A Participatory Research Process edited by George WNorton EA Heinrichs Gregory C Luther and Michael E Irwin (Ames IowaBlackwell Publishing Co 2005)

193

BOX 10-1

GENDER DIVISION of LABOR in BOTSWANAA study of traditional farms in Central Botswana uncovered illuminating

differences in the division of labor by gender Because men have opportu-

nities to work in mines a large proportion of rural households are headed

by females (40 percent in this study) In agricultural areas land is held

communally by the village and both men and women can obtain rights to

cultivate the land Mostly sorghum but also maize cowpeas and melon

varieties are grown on 4 to 5 hectare plots Livestock particularly cattle

are very important

In all aspects of economic activity there is a stark differentiation be-

tween male and female roles In crop production men traditionally plow

and maintain the fields women sow the seeds weed harvest and thresh

Men and boys almost exclusively tend and milk livestock (mostly cattle and

goats) while women manage the chickens used mostly for home con-

sumption Women brew and sell sorghum beer and beer sales can pro-

duce substantial amounts of household income

Women provide virtually all the labor for household maintenance Time

spent gathering firewood fetching water cooking and in other household

chores accounts for 68 percent of the womenrsquos total time Men allocate

only 10 percent of their total time to household chores Even so women

provide 38 percent more time for agricultural fieldwork than do men Women

provide 48 percent of the total hours worked by members of the house-

hold men account for 22 percent and the children the rest

Source Doyle C Baker with Hilary Sims Feldstein ldquoBotswana Farming Sys-

tems Research in a Drought Prone Environment Central Region Farming Sys-

tems Research Projectrdquo chapter 3 in Hilary Simms Feldstein and Susan V

Poats eds Working Together Gender Analysis in Agriculture Vol I Case Stud-

ies (Westford Conn Kumarian Press 1989) pp 43ndash7


Ethiopia for example research shows that women suffer more fromshocks to income and health9 Lower status of females has been associ-ated with weaker control over household resources less access toinformation and public services such as education and health discrimi-nation in employment and unequal rights to land and other importantassets10 Women are less likely to be members of producer and marketing

9 Stephan Dercon and Pramila Krishnan ldquoIn Sickness and in Health Risk Sharingwithin Households in Rural Ethiopiardquo Journal of Political Economy vol 108 no 4(August 2000) pp 688ndash727

10 Lisa C Smith Usha Ramakrishnan Aida Ndiaye Lawrence Haddad and ReynaldoMartorell The Importance of Womenrsquos Status for Child Nutrition in Developing Coun-tries International Food Policy Research Report number 131 Washington DCIFPRI 2003

194


BOX 10-2

GENDER and INTEGRATED PEST MANAGEMENTA recent study by Hamilton and others examines how gender roles in dif-

ferent regions of the world affect the use of pest management practices in

agriculture Studies show that improper use of pesticides can lower house-

hold incomes and have negative health consequences for household mem-

bers Women have a special interest in pesticide use as they frequently

shoulder responsibility for the health of the family particularly children

Evidence shows that women have to overcome unique barriers if they or

their families are to adopt integrated pest management (IPM) practices

which are usually associated with less use of pesticides Lack of recogni-

tion means that women are often excluded from information about IPM

practices they have less access to extension services are less likely to

participate in training and are less frequently members of producer orga-

nizations which transmit information to their members Women also have

less access to labor either due to excessive time demands on their own or

limited access to hired labor markets IPM practices tend to be labor inten-

sive Women have less access to land and because of uncertainty associ-

ated with IPM most adopters of IPM have larger holdings they adopt IPM

on part of their lands and use conventional techniques on others

Despite these constraints the experience from West Africa Philip-

pines and Central and South America found involvement of women to be

a key determinant of whether households use IPM or not Womenrsquos par-

ticipation in field-level trials in identifying constraints so that research could

address them and in training programs helped spread IPM adoption in all

the countries studied Women are especially receptive to IPM messages

because they play a major role in managing household finances and easily

recognize the health consequences of mishandled pesticides

Source Sarah Hamilton Keith Moore Colette Harris Mark Erbaugh Irene Tanzo

Carolyn Sachs and Linda Asturias de Barros ldquoGender and IPMrdquo Chapter 14 in

Globalizing Integrated Pest Management A Participatory Research Process

edited by George W Norton EA Heinrichs Gregory C Luther and Michael E

Irwin (Ames Iowa Blackwell Publishing Co 2005)

195


11 Juggins ldquoGender-Related Impacts helliprdquo

organizations and are less likely to have title to land (and thus accessto many forms of credit) These factors affect womenrsquos own nutritionaland health status and that of their children

DETERMINANTS of GENDER ROLES in AGRICULTURESocial cultural and religious factors population pressures farmingtechniques off-farm job opportunities colonial history income levelsdisease and health conditions and many other factors determine therole of women in farming systems Sometimes in areas with apparentlysimilar physical conditions women assume very different roles As off-farm job opportunities population pressures income levels and farm-ing techniques change so too does the role of women (see Box 10-3)

Shifting cultivation with hand labor lends itself more to femalelabor than does settled cultivation with a plow For countries with lowpopulation densities adequate food could be raised without using malelabor in farming Men used to spend their time felling trees huntingand in warfare In most areas agriculture has changed from shiftingcultivation to settled agriculture and cash crops This change has re-sulted in a greater role for men but often the role of women in farmwork still dominates

The shift to the plow and draft animals has made a difference inthe amount of male labor used in some areas and long-standing differ-ences in farming techniques undoubtedly account for many of the re-gional gender differences in farming activities In regions of intensivecultivation on small irrigated farms for example in several Asian coun-tries men women and children must work hard to generate enoughproduction on a small piece of land Work is mostly done by hand Incontrast on larger farms more tasks may be mechanized and womenmay devote a higher percentage of their time to housework In somecases mechanization has displaced female labor and lowered their sta-tus as a result since housework is often under-appreciated In othercases especially sub-Saharan Africa mechanization has increased theamount of land that can be cultivated by men and put additional strainon women who are responsible for planting and weeding

Integration of small-scale farmers into the labor market has in-creased the importance of womenrsquos role in agriculture because it isoften the males who find outside wage work In some countries malesmay work away from the household for several weeks or months at atime In Lesotho for example the result has been that 70 percent of thehouseholds are headed by women11 Diseases such as HIV-AIDS have

196

BOX 10-3

TANZANIA CONSERVATION AGRICULTURE

for SUSTAINABLE DEVELOPMENTThe Conservation Agriculture for Sustainable Agriculture and Rural Devel-

opment project which began in 2004 promotes conservation agriculture

(CA) for small-scale and resource-poor especially women farmers In the

project energy-efficient agricultural production technologies combined with

participatory methodologies enable farmers to adopt practices that reduce

labor and raise yields and incomes Women are the main providers of

agricultural labor in Tanzania and will benefit most from the reduced labor

requirements of CA

The project was centered in Arumeru District in the Arusha region of

Tanzania a highly agricultural rain-fed area The primary conservation tech-

niques are ripper tillers which reduce tillage by cutting furrows into the soil

rather than inverting it completely and the jab planter allows for planting

operations to be done through the soil cover with no tillage Farmer Field

Schools discussed later in this book were the main means of training

Participants in the schools were taught in a hands-on manner about CA

techniques Because CA was expected to have a strong impact on women

women represented the majority of field school participants and women

participants were followed carefully to see how CA affected them

Adoption of CA has three main impacts reduced demand for house-

hold labor increased food security through higher yields and increased

household income The labor effects are especially important in addition

to saving labor for planting mdash predominantly a womenrsquos activity mdash CA re-

quires better coordination of the land preparation and planting so women

and men work together more frequently Lower labor requirements associ-

ated with CA practices affect women and other family members differently

Poor women-headed households benefit from lower labor demands

because a decrease in labor pressures frees family members from the

requirement of working in the field Children can pursue their education

uninterrupted by sudden labor shortages Women in landless households

have fewer opportunities to sell their labor but higher crop yields mdash and

thus higher labor requirements for harvesting mdash could cushion the reduc-

tion in hired-labor opportunities Additional employment opportunities for

rural women laborers as a result of higher yields would have an immediate

effect on household livelihoods

Source The World Bank and the International Fund for Agricultural Develop-

ment Gender in Agriculture Sourcebook (Washington DC The World Bank

2009)


197

further complicated menrsquos and womenrsquos roles as sick people can nolonger work in agriculture women are increasingly assuming produc-tive roles while still being the primary care-giver to the ill

Policy ImplicationsWhy is it important to address gender inequities in society First as anormative concept gender equality is important in its own right Womenought to have equal legal and social status because social justice is animportant indication of development Second many recent studies haveshown that gender inequities slow the process of economic develop-ment Lower status of women is associated with less schooling lostearnings inefficient allocation of labor and poor health of womenand their children12 Over time gender inequities lead to lower nu-tritional and health status of children less educational attainmentand slower growth In agriculture gender is important as one of theseveral socio-economic characteristics that influence the adoptionof new technologies

Since women are important in agriculture their opinions must besought when designing new technologies The impact of these tech-nologies on the relationship between men and women should be con-sidered during this design If women are making production decisionsthey must receive education and guidance from extension services Mostinternational aid agencies such as the World Bank and the United StatesAgency for International Development now recognize that withoutconsidering the roles and responsibilities of women and receiving in-puts during project development these projects are much less likely tosucceed

Third an increasing body of evidence shows that as womenrsquos par-ticipation in the economy grows family well-being improves Incomeearned by women is more frequently used for purchases that broadlybenefit the family such as for health care school fees and food forchildren13

One means of improving income-earning opportunities for womenis to take steps to provide them with inputs such as credit and newseeds Women often have inadequate access to credit for a number ofreasons First in many societies women lack the legal status necessaryto enter into contracts Second only very infrequently do women hold

12 World Bank Engendering Development hellip13 See Norbert Schady and Joseacute Rosero ldquoAre cash transfers made to women spent like

other sources of incomerdquo Economics Letters vol 101 (2008) pp 246ndash8 and CherylDoss ldquoThe effects of intrahousehold property ownership on expenditure patternsin Ghanardquo Journal of African Economies vol 15 (1) (2005) pp 149ndash80


198


title to land often necessary as collateral for loans Third there seemsto be a bias against women in the administration of credit programs

It is likely that most new agricultural technologies are relativelygender neutral and we see some efforts on the part of certain publicextension systems to reach women farmers14 However lack of femaleaccess to credit and purchased inputs in many countries makes manynew technologies gender-biased Furthermore women often grow foodcrops that are minor in terms of value of production but are importantin the diets of families on small farms Agricultural research often ne-glects these crops and this neglect may have adverse effects on nutri-tion In addition because extension services are still highly male in mostcountries communication with female farmers can be inhibited Evenin Africa where women are the majority of farmers males have greatercontact with extension services

The impacts of credit technology and other agricultural policieson women have been exacerbated by discriminatory land reform andsettlement policies In Latin America where land reform and settle-ment schemes often have been designed to benefit ldquoheads of house-holdsrdquo women have been by convention largely excluded In Ethio-pia and Tanzania rights to lands have been bestowed on men In Asiamdash specifically the settlement schemes in Indonesia Papua New Guineaand Sri Lanka mdash land was given only to male heads of householdsInadequate access to land worsened by government policies whencombined with problems of access to credit can hinder womenrsquos abil-ity to participate in agricultural development Given the large role thatwomen play in developing-country farming systems efforts that ig-nore or discriminate against women have distorting effects and dimin-ish chances of success Studies have found that farm fields controlledby women often have lower yields due to lack of access to fertilizer andother resources

Economic development itself can have positive impacts on genderequality The process of development expands job opportunities andthe presence of more capital raises productivity These changes raisethe value of time mdash womenrsquos time as well as menrsquos Development also

14 In The Gambia research on rice was expected to increase womenrsquos income sincewomen were the primary producers Instead following the introduction of newtechnologies men took over this production See Joachim von Braun Detlev Puetzand Patrick Webb ldquoIrrigation Technology and Commercialization of Rice in TheGambia Effects on Income and Nutritionrdquo International Food Policy Research In-stitute Research Report No 75 Washington DC 1989

199

is typically accompanied by more investments in infrastructure such aswater roads and electricity These changes can lower work burdens ofwomen leaving more time for other duties Higher incomes leave moreresources for investments in assets such as human capital As incomesgrow gender disparities in education and health status tend to shrinkPublic investments in schools and health facilities lower the cost of in-vesting in human capital and help shrink gender inequalities In factgender disparities in education are most acute in the lowest-incomecountries and almost non-existent in high-income countries15

Despite strong empirical links between economic growth and gen-der equality equality is not an automatic bi-product of growth and thepath of development can have important implications for gender rela-tions Governments that encourage equal participation and foster rightsof women often find that growth and greater gender equality marchhand in hand Gender equality has beneficial growth effects and growthenhances womenrsquos rights Governments can be proactive by reforminginstitutions to establish equal rights and opportunities for women andmen they can strengthen policy and institutional incentives for moreequal access to resources and participation and they can take activemeasures to confront disparities16 At a minimum they should take stepsto monitor these disparities by measuring womenrsquos conditions


Colombian women receiving instructions on how to vaccinate a chicken

15 World Bank Engendering Development hellip16 See World Bank Engendering Development hellip particularly chapter 6

200


Role of ChildrenChildren represent the future human resource base of a country Eco-nomic growth and development over time depend on how resourcesare invested in children As noted in Chapter 4 children represent cur-rent sources of pleasure for parents and they are a source of invest-ment for future income gains and security in old age Children are amajor source of farm labor in every region of the world and their tasksexpand with each year of their age They typically begin by following aparent or sibling into the field and rapidly become involved in hoeingweeding harvesting and other tasks They feed and otherwise care foranimals They particularly boys may work as low-paid farm laborerson other farms Young girls often care for younger brothers and sistersto free their mother for other work Farm children throughout the worldtake on major farm responsibilities at a very young age

At times conflicts occur between the use of children in farm du-ties and providing income to the family and longer-term investmentsin their education For example in times of household crisis such asdrought or crop failures children may be pulled out of school to lowerexpenses (such as school fees) or increase incomes Such informal riskmanagement techniques can have long-term adverse consequences be-cause the childrsquos lifetime productivity is being compromised by reducedaccess to education Gender inequalities in investments in children havelong-term consequences but depend on social norms and other factorsFor example in many societies in time of crisis decreased spending ongirlrsquos education and even health care and food is a common means ofcoping with household financial stress Such actions lower the status ofgirls and their quality of life but are the product of long-standing cul-tural norms

As adults become ill from diseases such as HIV-AIDS and ma-laria children are called upon to assume a greater share of farm workand other household responsibilities Increased disease burdens espe-cially in sub-Saharan Africa are rapidly changing the roles of childrenand altering social structures in rural areas In fact some argue thatAIDS has increased the vulnerability of entire villages and regions tocrop failure and famine by lowering food production and increasingthe work burden on children These factors subvert livelihood-copingstrategies and mean that in time of need fewer assets are available tohouseholds to help them manage risks17 The epidemic is putting im-mense burden on children

17 A de Waal and A Whiteside ldquoNew variant famine AIDS and food crisis in south-ern Africardquo The Lancet vol 362 October 11 2003

201

Governments recognize the long-term adverse consequences ofusing children to manage household risks and recent experiments withconditional cash transfers are showing these programs to be very effec-tive An example is the PROGRESA program (now calledOportunidades) in Mexico whereby families are given regular butmodest cash allotments on the condition that their children remain inschool and receive regular nutrition and health interventions The pro-gram has proven to be so successful in increasing childrenrsquos educationparticipation reducing drop outs reducing child labor burdens andimproving child welfare that the Mexican government expanded itscoverage so that more than 40 percent of the rural population is nowcovered18 Other similar programs now exist in more than 30 develop-ing countries including virtually every country in Latin America andmajor programs in Bangladesh India Indonesia Turkey and Pakistan

SUMMARYThe overall productivity of the economy depends on the quantity andquality of labor Better-educated individuals earn higher incomes andthese higher incomes reflect greater productivity The underutilizationand low productivity of human resources in agriculture is a serious

18 See International Food Policy Research Institute PROGRESA mdash Breaking the Cycle ofPoverty Washington DC IFPRI 2002


Teenage child and her mother sorting the potato harvest

on a farm in Ecuador

202


problem in many developing countries Better-educated farmers aremore able to adopt new technologies are better able to understand priceand market information and have more access to credit and other formsof capital Education also prepares children for non-farm occupations

Women and children play important roles in agriculture and theseroles vary by region by stage of development and other factors Socialcultural religious technological off-farm employment historical andother factors determine the role of women in farming systems Womenrsquosroles in agriculture have implications for credit and input policies forthe generation and extension of new technologies and for land reformpolicies Gender inequities can have adverse implications for long-termdevelopment inside and outside of agriculture Compelling evidenceshows that governments should take proactive steps to lower genderinequalities

IMPORTANT TERMS and CONCEPTSConstraints faced by women farmersDeterminants of the role of women in agricultureHuman capitalImpacts of education on developmentImpacts of HIVAIDSImplications of the role of women in agricultureMultiple roles of womenPROGRESARegional differences in the roles of womenRole of children

Looking AheadIn this chapter we briefly examined the role of human resources fam-ily structure and women and children in the process of agriculturaland economic development In the next section we consider means forimproving those systems to increase agriculturersquos contribution to hu-man welfare We begin in Chapter 11 by providing an overview of ag-ricultural development theories and strategies before exploring in de-tail the individual components of those theories and strategies

QUESTIONS for DISCUSSION1 How do investments in human capital affect productivity inside

and outside agriculture2 What is the purpose of education for the farmer and his or her

family

203

3 Why should farmers support education if it just means their chil-dren will move out of farming and do something else

4 Why might education be considered a public good5 What are the major types of education6 What roles do women and children play in agriculture7 In which region of the world is the role of women in agriculture the

greatest8 What factors determine the roles of women in agriculture9 What are some important implications of the roles of women in

agriculture10 Why might census statistics and other data undercount female

participation in farming11 Why do women from near-landless and small-holder households

participate more in agriculture relative to those from larger farmswith more land ownership

12 How might gender inequality slow the process of development13 What steps might governments take to address problems of gender

inequality14 How does disease pressure affect the roles of children in farming

RECOMMENDED READINGSBaker Doyle C with Hilary Simms Feldstein ldquoBotswana Farming Sys-

tems Research in a Drought Prone Environment Central Regional Farm-ing Systems Research Projectrdquo in Hilary Simms Feldstein and Susan VPoats eds Working Together Gender Analysis in Agriculture Volume ICase Studies (West Hartford Conn Kumarian Press 1989) chapter 3

Boserup Ester Womenrsquos Role in Economic Development (London Allen andUnwin 1970)

Deere Carmen D ldquoThe Division of Labor by Sex in Agriculture A Peru-vian Case Studyrdquo Economic Development and Cultural Change vol 301982 pp 795ndash811

Folbre Nancy ldquoEngendering Economics New perspectives on WomenWork and Demographic Changerdquo Annual World Bank Conference onDevelopment (The World Bank Washington DC 1995)

Food and Agriculture Organization ldquoWomen in African Food Productionand Food Securityrdquo in J Price Gittinger Joanne Leslie and CarolineHoisington eds Food Policy Integrating Supply Distribution and Con-sumption (Baltimore Johns Hopkins University Press 1987) chapter 7

Gladwin Christine H and Della McMillan ldquoIs a Turnaround in AfricaPossible Without Helping African Women to Farmrdquo Economic Develop-ment and Cultural Change vol 387 1989 pp 305ndash44


204

Glewwe Paul ldquoSchools and Skills in Developing Countries EducationPolicies and Socioeconomic Outcomesrdquo Journal of Economic Literaturevol 40 (2) June 2002 pp 436ndash82

Quisumbing Agnes R Lynn R Brown Hillary Simms Feldstein LawrenceHaddad and Christina Pentildea ldquoWomen the Key to Food Securityrdquo Inter-national Food Policy Research Institute Washington DC August 1995

United Nations Centre for Social Development and Humanitarian AffairsldquoWomen Food Systems and Agriculturerdquo 1989 World Survey on the Roleof Women in Development (New York United Nations 1989) chapter 3

World Bank Engendering Development (New York Oxford University Press2001)

World Bank and the International Fund for Agricultural DevelopmentGender in Agriculture Sourcebook (Washington DC The World Bank2009)


205

PART 4

Getting Agriculture Moving

International Rice Research Institute in the Philippines

206

207

CHAPTER 11

Theories and Strategies

for Agricultural Development

The process of agricultural growth itself has remained outside the

concern of most development economists

mdash Yujiro Hayami and Vernon W Ruttan1

THIS CHAPTER1 Describes how the sources of agricultural growth tend to change as

development occurs and considers how theories of agricultural de-velopment have changed over time

2 Presents the theory of induced innovation as applied to agricultureand its implications for the types of technologies generated and forinstitutional change

3 Discusses how transactions costs and collective action may alter thedirection of technical change with implications for asset distribution

THEORIES of AGRICULTURAL DEVELOPMENTWe have discussed the importance of agricultural development for solv-ing the world food-income-population problem We have consideredthe nature and diversity of existing agricultural systems in developingnations We now need to consider means for improving these systemsto increase agriculturersquos contribution to human welfare In this chapterwe provide an overview of agricultural development theories and strat-egies In subsequent chapters we examine in more detail the individualcomponents of the basic strategies outlined here Our overriding con-cern is to identify strategies that facilitate growth with equity We

1 Yujiro Hayami and Vernon W Ruttan Agricultural Development An International Per-spective (Baltimore Johns Hopkins University Press 1985) p 41

208


explore why agricultural development has occurred in some countriesand why it has not (or has proceeded very slowly) in others

Many theories have been suggested to explain how the basicsources of growth (labor natural resources capital increases in scaleor specialization improved efficiency education and technologicalprogress) can be stimulated and combined to generate broad-basedagricultural growth2 It is clear from historical experience that the rela-tive importance of alternative sources of growth changes during thedevelopment process and has changed over time for the world as awhole It is also clear that institutional arrangements such as marketingsystems price and credit policies a well-functioning legal system andtransparently enforced property rights play an important role in stimu-lating or hindering development Letrsquos examine agricultural develop-ment theories and evidence to see what lessons they provide for opera-tional strategies

Expand the extensive and intensive marginsOne means of generating increased agricultural production is to ex-pand the use of land and labor resources The development of agricul-ture in North America South America Australia and other areas ofthe world during colonization was based on using new lands In somecases indigenous labor was also exploited The opening up of forestsand jungles by local populations in parts of Africa Latin America andAsia provide additional examples of expanded resource use Econo-mists call this increased use of land and labor expanding the extensivemargin

In many of these historical cases surplus lands and labor wereused to produce commodities for both local consumption and exportReductions in transportation costs facilitated exports In Thailand forexample rice production increased sharply in the latter half of the nine-teenth century and much of the increased production went to exportmarkets In many colonies exports of primary production were extractedfor use in more developed countries and often a large share of the ben-efits of these exports was not realized by the local countries but wastransferred to the developed countries

2 Hayami and Ruttan (Agricultural Development) have characterized previous agricul-tural development theories into six basic approaches (1) resource exploitation (2)resource conservation (3) location (4) diffusion (5) high-payoff input and (6) in-duced innovation The first part of the chapter draws heavily on their ideas

209


Agriculture in Asia is intensive even in hilly regionsExpansion of unutilized land resources provides few opportunities forsubstantial growth in developing countries today In areas of LatinAmerica and Africa where additional land does exist disease insectand soil problems prevent its use in agriculture Abundant labor is avail-able in many countries and continued growth of the labor force willgenerate increases in total agricultural output However most growthin per-capita agricultural output will have to come from more intensiveuse of existing resources

Many methods can be used to achieve more intensive resourceuse Early efforts in England Germany and other European countriesincluded more intensive crop rotations green manuring forage-live-stock systems drainage and irrigation In many developing countriesthese same factors increased land productivity Terracing is an effec-tive means of conserving soil productivity in hilly areas of Asia In themountainous regions of Central America grass strips have been usedto create terrace-like structures that conserve soil and enhance produc-tivity Crop rotations are frequently used to enhance soil productivityand control pests Hayami and Ruttan estimate that agricultural devel-opment based on similar types of ldquoconservationrdquo has been responsiblefor sustaining growth rates in agricultural production in the range of 1percent per year in many countries including developing countriesfor long periods of time3


Agriculture in Asia is intensive even in hilly regions

210


While scientists are gaining additional knowledge of the technicaland institutional considerations that can lower the cost of conservationefforts population pressures are creating a need for better ways of sus-taining the natural resource base Hence conservation is likely to playan increasingly important role in maintaining if not expanding agricul-tural production in the future

Another means of intensifying agricultural production is to pro-duce more crops per unit of time through altering cropping patterns orusing shorter season varieties so that two and three crops can be pro-duced per acres per year where one or two was produced before Suchproduction changes usually require scientific input to develop therequired seeds tools or other inputs to make the double or triple crop-ping possible Access to irrigation or surface water sources canfacilitate this intensification

Yet another means of intensification is through a process of diver-sification and production of higher-valued commodities This meansof intensification is likely to become more important as developmentproceeds and incomes grow creating increased demand for higher-valued vegetables and meats Intensity of production can be changedas well by improving transportation systems to bring higher-valuedcommodities to urban centers It has long been recognized that the pat-tern and intensity of agricultural production vary in relation to theproximity of urban-industrial centers and to the quantity and qual-ity of transportation4 Closeness to cities and transport matters becauseof differences in transportation and marketing costs in effects on laborand capital markets in the ease of obtaining new and more productiveinputs and in ease of information flows

One implication of this lsquolsquolocationrdquo theory of agricultural develop-ment is that countries should encourage decentralized industrial de-velopment particularly in the middle and late stages of developmentDuring these stages strong linkages between agriculture and marketsfor inputs (fertilizers and pesticides) and outputs can help stimulatethe local economy Developing nations should improve transportationinfrastructure in rural areas

Diffuse Existing KnowledgeAgricultural development can be stimulated by diffusing knowledgeamong farmers more rapidly within or across national borders Existing

4 Today economists still draw on theories proposed by Heinrick Von Thunen (1783ndash1850) who studied the optimal intensity of farm enterprises in relation to theirdistance to urban areas

211

technologies and economic knowledge can be transferred from the moreprogressive to the lagging farmers thereby increasing productivity Thisidea has provided part of the rationale for agricultural extension sys-tems particularly in farm management Unfortunately in some casesdiffusion theory has led to unrealistic expectations of the size of poten-tial productivity gains under the existing level of technology

Diffusion theory also has led to attempts to directly transfer knowl-edge and technologies from more-developed to less-developed coun-tries More success has been achieved with transferring knowledge thanwith transferring agricultural technologies Adoption of transferred tech-nologies has been limited except where efforts have been made to adaptthe technologies to the new setting

Develop High-Payoff InputsMore recent agricultural development theory builds on these earlierapproaches but adds the important dimension that the process can beaccelerated through provision of new and improved inputs and tech-nologies (particularly improved seeds fertilizers pesticides and irri-gation systems) This approach articulated by Schultz in TransformingTraditional Agriculture is based on the idea discussed in Chapter 7 thatfarmers in traditional agriculture are rational and efficient given theircurrent resources and technologies5 What these farmers need are newhigh-payoff inputs and technologies to increase their productivity6

The need for high-payoff inputs has been widely accepted becauseof the success achieved by modern wheat corn and rice varieties be-ginning in the 1950s and 1960s These varieties are highly responsive tofertilizer pesticides and water management and have resulted in sub-stantial growth in agricultural output in many developing countriesSome have argued that the relative absence of these inputs has beenone factor holding back agricultural development in Africa comparedto other developing regions The distributional or equity effects andenvironmental impacts of these inputs however have been the subjectof much debate and are discussed in more detail in Chapter 12

Hayami and Ruttan argue that the high-payoff input theory is in-complete because it fails to incorporate the mechanism that inducesthese new inputs and technologies to be produced in a country Thetheory also fails to explain how economic conditions stimulate the de-velopment of public agricultural experiment stations and educational

5 Theodore W Schultz Transforming Traditional Agriculture (New Haven Yale Univer-sity Press 1964)

6 Hayami and Ruttan have labeled Schultzrsquos approach the ldquohigh-payoff inputrdquo model


212

systems It does not attempt to identify the process by which farmersorganize collectively to develop public infrastructure such as irrigationand drainage systems In the next section we explore the induced inno-vation theory proposed by Hayami and Ruttan to address these issues

THEORY of INDUCED INNOVATIONInduced innovation theory helps explain the mechanism by which asociety chooses an optimal path of technical and institutional change inagriculture7 The theory says that technical change in agriculture repre-sents a response to changes in resource endowments and to growth inproduct demand Changes in institutions are induced by changes inrelative resource endowments and by technical change8

Induced Technical InnovationTechnical change in agriculture can follow different paths Technolo-gies can be developed that facilitate the substitution of relatively abun-dant and low-cost factors of production for relatively scarce and high-cost factors A rise in the price of one factor relative to others will in-duce technical change that reduces the use of that factor relative to oth-ers For example if the price of land goes up relative to labor and fertil-izer indicating that land is becoming relatively scarce technologies suchas improved seeds will be developed that can be combined with laborand fertilizer to increase production per unit of land

This process of induced technical change is illustrated graphicallyin Figure 11-1 The range of possible technologies in time period 0 canbe represented by what Hayami and Ruttan call the innovation possibili-ties curve I

0 The specific technology employed in that time period is

represented by the isoquant I0 Production occurs at point A with N

0

units of land and L0 units of labor the least-cost combination of those

resources given the price ratio P0 Now if over time labor becomes more


7 Induced innovation theory was developed originally by John R Hicks Theory ofWages (London MacMillan and Co 1932) Hayami and Ruttan during the 1960swere the first to apply the theory to agricultural development Their underlyingassumption is that technological and institutional changes are vital to agriculturaldevelopment

8 Hayami and Ruttan (Agricultural Development p 94) define institutions as ldquothe rulesof society or of an organization that facilitate coordination among people by help-ing them form expectations which can reasonably hold in dealing with others Theyreflect the conventions that have evolved in different societies regarding the be-havior of individuals and groups relative to their own behavior and the behaviorof othersrdquo

213


Figure 11-1 A model of induced technical change If the ratio of the price of

land to labor changes from Po to P

1 incentives are created not only to

substitute labor for land and to move from technology Io at point A to

technology I1 at point B but also to develop a new technology Irsquo

o at point C

Innovation possibility curves Io and I

1 represent the range of potential

technologies that can be applied in period 0 and period 1 (Source Hayami

and Ruttan Agricultural Development)

abundant relative to land so that the price of labor is reduced relative tothe price of land (the new price ratio is represented by P

1) incentives

are created to adopt a more labor-intensive technology If there wereno technical change production might occur at point B on isoquant I

1

However the theory of induced innovation says that incentives are cre-ated not only to select a new technology from the current technologyset (that is move to point B on I

1) but also to develop new technologies

to save scarce resources and use abundant resources more intensivelyThe new technology set is represented by the new innovation possibil-ity curve I

1 As the innovation possibility curve moves toward the ori-

gin the same quantity can be produced at lower cost Following thegeneration of this new technology set farmers can adopt the new least-cost technology 1 and employ N

1 of land and L

1 of labor at point C

214


Hayami and Ruttan compare the agricultural development histo-ries of Japan and the United States to illustrate the validity of the theoryJapan experienced increasingly higher priced land compared to laborand stressed the development of biological technologies such as im-proved seeds and fertilizers These technologies tend to save land anduse labor more intensively The United States on the other hand hasapproximately two times as much land per worker as does Japan Asthe US frontier was moved west land became relatively abundant com-pared to labor and the development of mechanical technologies thatsaved labor was stressed The result was successful agricultural devel-opment in both countries but agricultural output per worker is 10 timesgreater in the United States than in Japan while output per hectare is 10times greater in Japan than in the United States9

Changes in output price relative to an input price also can inducetechnical change as illustrated in Figure 11-2 The curve u representsthe range of current and possible production technologies in a giventime period Hayami and Ruttan call this the meta production functionSpecific production technologies are represented by v

0and v

1 At the

initial fertilizer-output price ratio (P0) producers use technology v

0 and

produce at point A If the price of fertilizer falls relative to the price ofoutput (P

1) then incentives are created to move to point B on the exist-

ing technology If the price ratio P1 is expected to continue farmers

press scientists to develop a more fertilizer responsive variety v1 if it

does not already exist Farmers adopt the new variety and move to pointC In the long run the meta production function itself may shift as morebasic scientific advances are made

Induced Institutional ChangeIncentives are created for technical change but where do these newtechnologies come from How do farmers acquire them What deter-mines whether technologies are developed that are suitable for all farm-ers or only for some of the farmers All of these questions are addressedby the theory of induced institutional change

Farmers demand new technologies not only from private inputsuppliers but from the public sector as well Hayami and Ruttan arguethat public research scientists and administrators are guided by price

9 Hayami and Ruttan Agricultural Development Many developing countries particu-larly in Asia are finding the Japanese path of technical change more appropriatethan the US path given their relative resource endowments and the nature ofchanges in those endowments

215


Figure 11-2 Shift in fertilizer response curve as price ratio changes If the

outputfertilizer price ratio changes from Po to P

1lsquo incentives are created not

only to apply more fertilizer and increase output from A to B using the

traditional variety vo but to develop and adopt a new variety v

1 and to move

to point C Curve u represents the ldquoenveloperdquo of a series of available and

potential crop varieties (Source Hayami and Ruttan Agricultural

Development)

signals and by pressures from farmers The more highly decentralizedthe research system the more effectively these pressures work Researchsystems that welcome and facilitate inputs from farmer groups and thatengage in participatory planning and research are also more respon-sive The development of the research systems themselves can be theresult of pressures from farmers who are responding to market forces

Induced innovation occurs not only in agriculture but in theeconomy as a whole For example as energy and gas prices rise pro-ducers and consumers not only switch to existing more energy-efficient vehicles but press for new types of vehicles that are even morefuel saving The public sector may also respond with laws that requiremore fuel-efficient cars

Many other types of institutions (rules of society or organizations)affect technical change and agricultural development The rights to landmarketing systems government pricing and credit policies and lawsgoverning contracts are just a few The theory of induced institutional

216

10 Share tenure is an arrangement whereby a farmer who is renting land pays the rentwith a fixed percentage of the farmerrsquos output


innovation recognizes that institutions can become obsolete and in needof adjustment over time It says that new technologies and changes inrelative resource endowments or price changes provide incentives fora society to demand new institutional arrangements (see Box 11-1 foran example)

Examples of institutional changes induced by technological changecan be found in the shift from share tenure to more fixed-payment leaseswhich has occurred in several countries as new varieties and irrigationsystems have increased yields while reducing risks10 An example of aninstitutional change due to a change in relative resource endowmentsis the switch from communally owned land to more private forms ofproperty rights as population pressures increase land scarcity

In some countries we observe what appear to be socially desirableinstitutional changes technical changes and relatively rapid and broad-based agricultural development However in others we observe whatseems to be perverse institutional change agricultural stagnation oragricultural growth with the benefits received by only a small segmentof the population Of course many countries fall between these extremesor may move from one group to the other over time Why do we seethese differences in institutional changes that influence agriculturalperformance and how do they relate to the theory of induced innova-tion The answer lies partly with transactions costs and with the incen-tives for and effects of collective action by groups of people with com-mon interests

IMPLICATIONS of TRANSACTIONS COSTS and

COLLECTIVE ACTIONThe induced innovation theory presented above implicitly assumes well-functioning markets for all products and factors Prices are assumed toconvey all the relevant information to decision-makers and resourcesare allocated efficiently and independently of the distribution of assets(such as land) in society Price-responsive producers are assumed topossess knowledge about alternative technologies and be able to lobbyagricultural scientists to develop improved technologies to save scarceresources Assuming no economies-of-scale in production there is oneoptimal path for technological change

217


BOX 11-1

INDUCED INSTITUTIONAL INNOVATION in JAVAIn Java customary rules have governed both land rights and labor ex-

change for many centuries With traditional technologies these rules have

helped allocate resources so that subsistence levels of foods have been

available to all village members These communal institutions have been

put under stress by modern technologies that increase the productivity of

labor and the returns to landowners These changes induce changes in

the institutions governing resource allocation

An example of an institutional innovation is the disappearance of the

bawon rice harvesting system This traditional system allowed everyone

whether they were from a particular village or not to participate in the har-

vest and share the output As population grew with traditional technolo-

gies this purely open bawon system gradually evolved into various forms

some of which limited harvest rights to village residents while others lim-

ited harvest rights to a set number of participants or to people who were

invited by the farmers

The widespread diffusion of fertilizer-responsive rice varieties created

sharply higher returns to harvest labor and induced a remarkable change

in harvest-contract institutions One such innovation was the introduction

of the tebasan system in which standing crops are sold to middlemen who

hire contract labor for harvesting and thus reduce the harvesterrsquos share

while increasing returns to the landowners Another institution is the

ceblokan system which limits harvesting rights to those workers who per-

form extra services such as transplanting and weeding without pay A study

shows that in a village where ceblokan was first adopted in 1964 by seven

farmers by 1978 96 out of 100 farmers had adopted the system

These innovations in harvest-labor institutional arrangements were

largely spurred by increased incomes and higher wages accompanying

technological innovation Increased incomes and wages created incen-

tives for farmers to change their labor-contracting system These changes

are now widespread in Java

Source Masao Kikuchi and Yujiro Hayami ldquoChanges in Rice Harvesting Con-

tracts and Wages in Javardquo Chapter 6 in Hans P Binswanger and Mark R

Rosenzweig eds Contractual Arrangements Employment and Wages in Ru-

ral Labor Markets in Asia (New Haven Conn Yale University Press 1984)

218


Transactions CostsUnfortunately transactions costs affect both factor and product mar-kets creating the possibility of differing optimal paths of technicalchange and of institutional change depending on farm size or otherfactors Transactions costs refer to the costs of adjustment of informa-tion and of negotiating monitoring and enforcing contracts11 Thesecosts arise because assets are fixed in certain uses in the short-run be-cause there is a lack of perfect information because there are differ-ences in the ability to use information and because people are willingto benefit at the expense of others12

The presence of transactions costs may mean for example thatthe cost of credit decreases as farm size increases that labor costs perhectare increase as farm size increases (because of supervision costs)and the cost of land transactions declines as farm size increases There-fore as farm size grows labor use per hectare may decline while ma-chinery use per hectare and the demand for capital-intensive technolo-gies may increase Owners of large farms also maybe quicker to adoptnew technologies because they have fewer credit constraints affectinginput purchases

The presence of transactions costs means that the distribution ofassets matters for the direction of technical and institutional change13

Because the demand for particular types of technical and institutionalchanges will vary by farm size the potential is created for conflictingdemands on the public sector Politicians and other public servants re-spond to the demands of competing groups by considering their ownpersonal gains and losses Consequently a change that would benefitsociety as a whole may not occur if a politician receives greater privategain from an interest group that does not want the change than from agroup that does

11 A succinct discussion of transactions costs is found in Douglas C North ldquoInstitu-tions Transactions Costs and Economic Growthrdquo Economic Inquiry vol 25 1987

12 William J Baumol mdash in ldquoWilliamsonrsquos The Economic Institutions of Capitalismrdquo(Rand Journal of Econometrics vol 17 1986 p 280) mdash points out that if there were nofixed or sunk costs in land capital or people resources could easily be transferredto optimal uses If information were perfect or if people could always figure outhow to design contracts to cover any contingency fixed costs would not matter Ifpeople did not try to profit at othersrsquo expense contracts could be drawn looselyand adjustments made as conditions change

13 See Alain deJanvry Marcel Fafchamps and Elisabeth Sadoulet ldquoTransaction CostsPublic Choice and Induced Technological Innovationsrdquo in Bruce M Koppel edInduced Innovation Theory and International Agricultural Development A Reassessment(Baltimore and London Johns Hopkins University Press 1995)

219


Collective ActionWhen producers of a commodity are few economically powerful andregionally concentrated they may find it easier to act collectively toinfluence public decisions in their favor than if these conditions do nothold Even if the conditions do not hold if a commodity is very impor-tant in the diets of people in urban areas or if it earns substantial for-eign exchange the public sector still may act to help its producers How-ever if producers are neither organized into a powerful collective lobbynor producing an important commodity for urban consumption or ex-port they will seldom receive public help such as new technologiesThis fact may explain why peasant farmers with small land holdingsare often neglected when agricultural research priorities are set

Implications for Induced InnovationThe implications of transactions costs and collective action for the in-duced-innovation model presented earlier are illustrated in Figure 11-3 Changes in the underlying resource base for the country as a wholemight imply that the least-cost path of technical change would occur inthe direction of arrow Z (ie a path that would use relatively abundantlabor and save relatively scarce land) Following path Z might be facili-tated by the development of new labor-intensive biologically-basedtechnologies However if a few large-scale producers due to the pres-ence of transactions costs and collective action were able to influencepublic officials so that technology Irsquo

0 were to be developed rather than

Irsquo1 then technical change might occur in the direction of arrow Y (per-

haps through the development and adoption of capital-intensive me-chanically-based technologies) rather than arrow Z Benefits to the largefarmers would be maximized but overall economic efficiency gainsmight be reduced

The concern over the existence of transactions costs and collectiveaction is not just a concern over the distribution of the benefits of agri-cultural development Rather it is a concern that the rate of economicgrowth itself will be diminished as well If in the previous examplethe farmers demanding path Y were few in numbers and their totalvalue of production compared to the farmers demanding path Z alsowas small then the decision to develop technology along path Y wouldmean a growth rate below the countryrsquos potential

Policy ImplicationsThe above discussion illustrates that technological progress is impor-tant for agricultural development but so too are institutional arrange-ments and information Although the theory of induced innovation

220


provides an optimistic look at how market forces can work almost likean invisible hand to stimulate technological and institutional changethe presence of transactions costs and collective action sound a cau-tionary note that there is an invisible foot out there eager to stomp onthat hand The reality that agricultural and overall economic develop-ment has progressed steadily in some countries while stagnating in oth-ers demonstrates that development is neither automatic nor hopelessAn operational agricultural development strategy is needed that rec-ognizes (a) the role that relative prices can play in guiding technicaland institutional change (b) that imperfect information and other trans-actions costs can sidetrack development unless domestic and interna-tional institutions are proactively developed to constrain inappropri-ate collective action Inappropriate here is defined as actions thatimpose gross inefficiencies on the sector or that fail to meet the equity

Figure 11-3 Induced technical innovation in the presence of transactions

costs The direction of technical change as dictated by changes in relative

factor prices might call for cost-reducing path Z However transactions costs

and collective action may create pressures to follow path Y reducing the rate

of overall economic growth

221


Improved transportation to reduce transactions costs

becomes critical as development proceeds

goals of a society In the sections below several of these institutions arebriefly mentioned they are discussed more thoroughly in subsequentchapters

Domestic institutionsLand credit pricing marketing and research policies are all critical todevelopment and adoption of appropriate technologies and for agri-cultural development in general Sources of agricultural growth changeover time and few countries today are able to achieve substantial pro-duction increases by expanding their land bases In addition land cur-rently in production is being degraded in many countries due to popu-lation and other pressures on a fragile natural resource base Owner-ship of land and other assets is highly unequal in many countries andfragmented in others Hence one institutional component of an opera-tional agricultural development strategy is to reexamine the arrange-ments governing land ownership and use and to make any needed ad-justments

Improved transportation marketing and communications systemsalso become critical as development proceeds Lower transportationmarketing and communications costs can reduce transactions costs andimprove information flows and thereby facilitate broad-based agricul-tural growth Isolated regions tend to be poor regions

222


Provision of high-payoff inputs and credit to finance their pur-chase are additional components of a successful agricultural develop-ment strategy Farmers are rational and relatively efficient given theircurrent resources Consequently new inputs embodying improved tech-nologies are needed to improve the productivity of farmers in develop-ing countries Research and technology-transfer policies can facilitatethe development and adoption of these technologies In addition pric-ing policies should be designed so as not to discourage the use nor en-courage the abuse of improved inputs

Educational levels of farmers also must be increased to improvetheir ability to recognize the benefits of and to use the technologiesEducation improves the capacity of people to assimilate and use infor-mation and thus can help reduce transactions costs

Macroeconomic and International InstitutionsAgricultural development is affected by macroeconomic and trade poli-cies that arise outside the agricultural sector The levels and types oftaxes spending and government borrowing can dramatically influencefarm prices and input costs Exchange rates or the value of the countryrsquoscurrency relative to currencies in other countries can have major ef-fects on domestic agricultural prices and trade

In some countries foreign debt repayments significantly constraingrowth and reduce domestic consumption Internationally influencedinterest rates and prices vary substantially over short periods of timeadding an additional measure of unpredictability to debt levels andnational incomes International labor markets for agricultural scientistsmean that high salaries draw some of the brightest and most educatedscientists to more developed countries and international agencies For-eign aid is a source of capital and technical assistance for some coun-tries but is often unreliable and usually comes with strings attachedDeveloping countries must carefully design macroeconomic and tradepolicies that do not discriminate against their agricultural sector if theyexpect it to grow

Enlightened Self InterestAny operational agricultural or economic development strategy must(1) recognize individual incentives (2) consider the lack of perfect in-formation and (3) include institutional arrangements to offset exter-nalities and other market imperfections Individuals must feel it is intheir self-interest before necessary institutional changes will occur

Information is valuable imperfect and costly to acquire and canexhibit economies of scale in acquisition These attributes of information

223


provide the incentives and the means for some people to use the ad-vantage they have from asset ownership military power or their will-ingness to engage in unscrupulous behavior to acquire informationbefore others

In fact even if all assets were initially distributed equally unlessinformation were available equally to all or unless enforceable ruleswere instituted to constrain dishonest behavior the willingness of someto gain ldquounfairrdquo advantage would eventually lead to unequal distribu-tions of assets In primitive societies information is basically availableto all and inappropriate activities are constrained by social and cul-tural norms However as societies become more complex concurrentlywith economic development information becomes more imperfect andnew institutions are needed to replace the rules that no longer constrainbehavior14

People must feel it is in their interest to design and enforce par-ticular institutional changes and they need to know the implications ofthose changes Institutional change involves costs because some peoplebenefit from current arrangements and will fight any change

The following six suggestions might help lower the cost of institu-tional change through enlightened self-interestbull First in those countries where asset ownership has become so un-

equal that inefficiencies in property rights are retarding agriculturaldevelopment asset redistributions (particularly land) are neededusually with compensation arrangements (so that the changes willin fact occur)

bull Second improvements in education communications and transpor-tation can improve information flows and the ability of a large num-ber of people in the country to act on information

bull Third decentralized industrial growth should lower labor adjustmentcosts (and facilitate employment) reduce externalities associated withurban crowding improve market performances in rural areas andhelp stimulate agricultural growth

bull Fourth social science research can help lower the cost of designingand examining the implications of alternative institutional changesaffecting agriculture

bull Fifth a government structure is needed that includes enforceable lawsto protect citizens from each other and from the government itselfGovernment policies and regulations can also be used to reduce

14 These ideas are similar to those expressed by North (ldquoInstitutions Transactions Costsand Economic Growthrdquo) pp 420ndash5 North notes that impersonal exchange withthird-party enforcement is essential for economic growth Third-party enforcementimplies that legal institutions exist

224


market failure Well-functioning and transparent legal systems withindependent judiciaries can help facilitate transition toward enhancedinstitutions

bull Sixth improved and enforceable international laws and other institu-tions are needed to reduce incentives for international abuses of power

SUMMARYSeveral theories of agricultural development have been proposed overtime Expansion or conservation of resources diffusion use of high-payoff inputs and induced innovation are some of the major ones Tech-nical and institutional changes are key components of any operationalagricultural development strategy These changes can be induced byrelative price changes resulting from change in resource endowmentsand product demand Because of transactions costs collective actionand the realities of human behavior agricultural sectors may not fol-low an economically efficient development path The distribution ofassets has important implications in the presence of transactions costsand collective action If land is unequally distributed then because oftransactions costs the demands (for technologies inputs policies etc)of one group of producers are likely to be very different from those ofothers Collective action can then pull the development process fromits optimal path Institutional changes to improve information flowsand constrain exploitive behavior can become critical to agriculturaldevelopment

IMPORTANT TERMS and CONCEPTSAgricultural research and extension Innovation possibilities curveAsset distribution International factorsAsset fixity and adjustment costs Invisible handCommunications Location theoryCompensation schemes Macroeconomic factorsDiffusion theory Market failureEnlightened self-interest Meta production functionsExternalities Perfect informationHigh-payoff inputs Resource conservationInduced institutional innovation Resource exploitationInduced technical innovation Transactions costs

Looking AheadIn this chapter we considered theories of agricultural development andsuggested a broad framework for operational agricultural developmentstrategies In the following five chapters we consider sector-specific

225


means of generating particular technical and institutional changes tostimulate agricultural growth In later chapters we consider macroeco-nomic and international factors We begin in Chapter 12 by focusing onagricultural research and extension

QUESTIONS for DISCUSSION1 Contrast the resource exploitation resource conservation and

diffusion theories of agricultural development2 Why is the resource exploitation theory of agricultural develop-

ment less useful today than it was historically3 Why has the importance of resource conservation increased is

recent years4 What are the limitations of the diffusion theory of agricultural

development5 Why has the high-payoff input theory become widely accepted6 What criticisms do Hayami and Ruttan make of the high-payoff

input theory7 Describe the theory of induced technological innovation Be sure to

identify both the importance of relative input price changes andchanges in the relative prices of inputs to outputs

8 Describe the induced institutional innovation theory9 Contrast transactions costs and collective actions10 What are the implications of transactions costs and collective

action for institutional innovation11 What do we mean by the term enlightened self-interest12 How might information be made more accessible to farmers13 What are the implications of a grossly unequal asset ownership

pattern for economic growth14 Why are improved international institutions needed for agricul-

tural development15 Why does Japanese agriculture have much higher output per

hectare than US agriculture but much lower output per worker

RECOMMENDED READINGSHayami Yujiro and Vernon W Ruttan Agricultural Development An In-

ternational Perspective (Baltimore Johns Hopkins University Press 1985)Chapters 3 and 4

Koppel Bruce M ed Induced Innovation Theory and International Agricul-tural Development A Reassessment (Baltimore and London Johns HopkinsUniversity Press 1995)

North Douglas ldquoInstitutions Transactions Costs and Economic GrowthrdquoEconomic Inquiry vol 25 1987 pp 415ndash228

226


Ruttan Vernon W Technology Growth and Development An Induced Inno-vation Perspective (Oxford Oxford University Press 2001)

Williamson Oliver The Economic Institutions of Capitalism (New York FreePress 1985)

227

CHAPTER 12

Research Extension and

EducationThe man who farms as his forefathers did cannot produce muchfood no matter how rich the land or how hard he works

mdash Theodore W Shultz1

THIS CHAPTER1 Discusses the role of public and private agricultural research in gen-

erating improved technologies and institutions and the effects of thosetechnologies on income growth and distribution and on food secu-rity

2 Describes the major types of agricultural research and factors influ-encing the transfer of research results from one country to another

3 Examines the role of technology and information transfer mechanismssuch as public agricultural extension and non-governmental organi-zations

THE ROLE of AGRICULTURAL RESEARCHA major determinant of growth in agricultural production is the effec-tiveness of agricultural research Through research the productivity ofexisting resources is increased new higher-productivity inputs and waysof producing food are developed and new or improved institutionalarrangements are designed Examples of research outputs includehigher-yielding plant varieties better methods for controlling insectsand diseases increased knowledge about methods for manipulatingplant or animal genes and designs for improved agricultural policiesResearch creates the potential for increased agricultural productionmoderated food prices increased foreign exchange reduced pressure

1 Theodore W Schultz Transforming Traditional Agriculture (Chicago University ofChicago Press 1964) chapter 1 p3

228


on the natural resource base and many other positive results Letrsquos con-sider in more detail the nature of these effects and the possibilities fornegative as well as positive outcomes

Over time agricultural research has been associated with improve-ments in incomes and reductions in poverty It is estimated that with-out the productivity improvements generated through agricultural re-search an additional 350 million hectares of land about the size of In-dia would have been needed to feed the worldrsquos population growthsince 1960 Productivity gains have thus saved highly erosive fragilesoils reduced deforestation and helped preserve biodiversity2 Spe-cific research successes include a new African rice variety that is moreproductive and better suited to harsh environmental conditions cas-sava varieties that are resistant to cassava mosaic virus and raise yieldsby 10 tons per hectare and enhanced strains of tilapia fish that grow 60percent faster than traditional strains3 Despite consistent evidence ofhigh rates of return to agricultural research pressures to reduce fund-ing for it are frequent

Impacts on Agricultural ProductivityProductivity increases generated through agricultural research imply ashifting upward of agricultural production functions The simple ex-ample of increasing the output per unit of an input say fertilizer isillustrated in Figure 12-1 If a more responsive seed variety is madeavailable through research output produced per kilo of fertilizer mayincrease The research that produced that higher quality seed may beeither public or private or both Public research is conducted in na-tional research institutions public universities or government-sponsored research in private entities Private research is financed byprivate companies

Research and subsequent technical change in agriculture raisesreturns to producers The value of agricultural production added perworker is shown in Table 12-1 for India China Indonesia Nigeria andBrazil (five of the more populous countries of the world) for the timeperiods 1979ndash81 and 1998ndash2000 Despite rapid population growth whichmight be expected to push production onto more marginal agriculturallands agricultural productivity per worker rose substantially in eachof these countries about doubling in China and almost tripling in Bra-zil This same pattern is found in most other developing countries

2 See CGIAR Science Council Science for Agricultural Development Changing Contextsand New Opportunities (Rome Italy Science Council Secretariat 2005)

3 See CGIAR Science Council Science for Agricultural Development for details

229

Figure 12-1 The effect of research on input productivityNew technologies generated through research can shift the

production response function upward

Table 12-1 Agricultural Value-added Per Worker (2000 dollars)

Country 1980 1990 2000 2003

India $273 $348 $389 $406China $163 $245 $346 $349Indonesia $425 $480 $522 $574Nigeria $491 $578 $774 $871Brazil $1113 $1628 $2585 $3227

Source World Bank World Development Indicators On-line Database

although output per capita for the total population has declined in sev-eral sub-Saharan Africa countries where rapid population growth hasoutpaced slow productivity improvements

The examples shown in Figure 12-1 and Table 12-1 are oversimpli-fied in the sense that most new technologies require different mixes ofinputs not all other inputs are held constant Measurement of total pro-ductivity gains due to research requires netting out the cost of any ad-ditional inputs employed with the improved technologies The result-ing total net cost reduction per unit of output produced can then be


230


used to summarize the total productivity effect This total productivityeffect is illustrated in Figure 12-2 New or improved technology shiftsthe original commodity supply curve (S

1) downward to S

2 because the

supply curve is a marginal cost curve and the new technology has re-duced the cost of production The new lower cost of production perunit of output means that more output is produced at a lower priceThis lower price is good for consumers of the product but producersmight be hurt

Many studies have been conducted to estimate the economic re-turns to society from public research investments aimed at achievingthese productivity increases A recent study found more than 1700 dis-tinct estimates of the returns to various research programs around theworld4 A summary of the results is presented in Table 12-2 Individual

Figure 12-2 Effect of research on supply Agricultural research reducesthe cost per unit of output thereby causing the supply curve to shift

down to the right

4 See Julian M Alston Connie Chan-Kang Michele C Marra Philip G Pardey and TJ Wyatt ldquoA Meta-Analysis of Rates of Return to Agricultural RampDrdquo IFPRI Re-search Report 113 (Washington DC International Food Policy Research Institute2000)

231

programs and projects vary widely in their estimated returns but onthe whole agricultural research has been a highly profitable investmentfor the societies that undertake it Both mean and median annual ratesof return are well above government cost of capital or earnings on al-ternative investments National leaders have a responsibility to investscarce public resources in activities that yield high returns

Increased agricultural productivity not only creates the potentialfor higher real incomes to producers through lower costs and to con-sumers through lower food prices but can also help a countryrsquos agri-culture become more competitive in world markets Efficiency gainedthrough higher agricultural productivity can be turned into foreignexchange earnings or savings as a result of additional exports or re-duced imports

The fact that agricultural research has yielded high returns in manycountries in the past does not imply that these returns are guaranteedfor all research systems or types of research Each country must care-fully consider the appropriate type of research organization and port-folio of activities given its resource base and special needs (see Box 12-1 for an example of a research portfolio) This issue is discussed in moredetail below

Distributional and Nutritional EffectsAgricultural producers at different income levels with different farmsizes in different locations and with different land tenure arrangementscan gain or lose as a result of new technologies and institutional changesgenerated through research These gains and losses depend on marketconditions among other factors Consumers are major beneficiaries ofagricultural research due to falling product prices but the benefits theyreceive vary as well by income level and are influenced by the nature ofthe research portfolio Returns to land versus labor are also influencedby research Nutritional implications follow from these differential pro-ducer consumer and factor-income effects

Farm Size and Tenure The issue of whether improved agricul-tural technologies benefit large farms more than they do small farmshas been the subject of substantial debate Farm size is not a major im-pediment to adoption of new biological technologies such as improvedseeds which are the major focus of developing country agriculturalresearch However larger farms do tend to be among the first adoptersof many new technologies probably because it pays large farms moreto invest in obtaining information about the technologies Owners oflarge farms may have more formal education that helps them process


232


TABLE 12-2 Rates of Return to Agricultural Research

by Commodity Orientation

Commodity Number Mean rate Median rateorientation of estimates of return of return

(count) (percent) (percent)

Multicommoditya 436 80 47All agriculture 342 76 44Crops and livestock 80 106 59Unspecifiedb 14 42 36

Field cropsc 916 74 44Maize 170 134 47Wheat 155 50 40Rice 81 75 51

Livestockd 233 121 53Tree cropse 108 88 33Resourcesf 78 38 17Forestry 60 42 14

All studies 1772 81 44

a Includes research identified as ldquoall agriculturerdquo or ldquocrops and livestockrdquo aswell as ldquounspecifiedrdquo

b Includes estimates that did not explicitly identify the commodity focus ofthe research

c Includes all crops barley beans cassava sugarcane groundnuts maizemillet other crops pigeon pea chickpea potato rice sesame sorghumand wheat

d Includes beef swine poultry sheep goats all livestock dairy other live-stock and pasture

e Includes ldquoother treerdquo and ldquofruit and nutsrdquo

f Includes fishery and forestry

Source Julian M Alston Connie Chan-Kang Michele C Marra Philip G Pardeyand T J Wyatt ldquoA Meta-Analysis of Rates of Return to Agricultural RampDrdquoIFPRI Research Report 113 (Washington DC International Food Policy ResearchInstitute 2000) Table 15 p 58

the information and a greater ability to absorb risk Large farms oftenhave better access to the credit needed to purchase modern inputs Mostsmall farms in the same region as large farms do eventually adopt thetechnologies but the first adopters typically receive greater income gainsfrom them Late adopters may be faced with lower producer prices be-cause supplies shift outward as early adopters increase output Of courseeven if all producers in a given region adopted a scale-neutral tech-nology at the same time absolute income differences would widen

233

BOX 12-1

MAJOR TYPES of RESEARCH in the NATIONAL

AGRICULTURAL RESEARCH INSTITUTION in ECUADOR

1 Plant breeding development of new lines and varieties that yield moreand are resistant to insects and diseases maintenance of a germplasmcollection

2 Cultural practices determination of optimal planting densities improvedharvesting methods

3 Crop protection improved methods for control of insects diseasesweeds nematodes including biological cultural and chemical meth-ods

4 Soils and fertilizers development of improved soil conservation meth-ods chemical analysis of soils including macro- and micro-element analysis toxicity studies economic analysis soil conservationand fertilization practices

5 Water management studies of water needs improved irrigation meth-ods salinity control

6 Mechanization design of improved agricultural implements7 Socioeconomics diagnosis of constraints to technology adoption moni-

toring and evaluation of research analysis of farm management prac-tices and opportunities

8 Technology validation on-farm transferring testing and validation ofnew technologies

9 Seed production basic and registered seed production technologiesfor seed production improved vegetative propagation

10 Post-harvest technologies improved methods for storage dryingcleaning packaging and transporting agricultural products

11 Agro-forestry improved systems of agro-forestry and of pasturing for-ests

12 Animal improvement animal breeding introduction and selection ofanimals from outside the country adaptation of animals to different cli-mates

13 Animal health prevention and cure of diseases and external and in-ternal parasites

14 Animal nutrition improved forages analysis of concentrates and othersupplementary feeding programs evaluation of nutritional deficienciesnutritive value of feeds

Source Julio Palomino Planning Director National Agricultural ResearchInstitution Ecuador

The listing below of the major types of agricultural research activities inEcuador provides an example of a typical applied research portfolio for asmall developing country Given its limited research budget the countrymust decide which commodities to concentrate on and how much to em-phasize each type of research


234


because the increased returns per hectare are spread over more hect-ares on larger farms

As noted in Chapter 11 not all technologies and institutionalchanges are scale-neutral For example certain types of mechanical tech-nologies can be used profitably on large but not on small farms Withdifferences in transactions costs large farmers may press research sys-tems for research results suitable for them even if the countryrsquos resourcebase on average would dictate a different type of technology Also whilemany technologies are scale-neutral and some are biased toward largefarms it may be difficult to generate technologies biased toward smallfarms All this implies that reducing transactions costs through im-proved information is important but it also implies that research maynot be the best policy tool for achieving distributional objectives

Tenant farmers represent an important producer group in manycountries It is difficult to generalize about the effects of research on theincomes of tenants versus landlords One might expect that improvedbiological technologies would make labor more productive and thushelp tenants but the distribution of income gains is influenced by otherfactors as well If each landlord has several tenants so that the averagesize of landlord holdings is greater than the average size of tenantsrsquofarms then the average landlord would gain relative to the averagetenant if each received equal shares of income gains per hectare

Contractual arrangements influence the distribution of researchbenefits and the arrangements may change as well as a result of newtechnologies5 If the tenant pays the landlord a fixed share of the outputthe division of any income gains after adopting the new technologydepends on the relative sharing of both output and production costsBut if the tenant pays a fixed amount to the landlord the tenant cankeep the income gains until the landlord raises the rent Often increasesin land productivity are bid into land rents and landshyowners are ableto capture these rents by changing tenancy agreements

Regional Disparities Regional differences in resource endow-ments and basic infrastructure can influence the distribution of researchgains among producers In fact interregional disparities in the net ben-efits from research tend to be larger than intraregional disparities Datafrom India indicate that the new rice and wheat varieties that increasedproduction so dramatically in that country in the late 1960s benefitedprimarily the more productive wheat and rice states Productivity

5 See George W Norton Philip G Pardey and Julian Alston Science Under ScarcityPrinciples and Practice for Agricultural Research Evaluation and Priority Setting (IthacaNY Cornell University Press 1995) Chapter 3

235

increased dramatically in the countryrsquos northern region At the sametime during 1967 to 1976 the central and eastern regions actually haddecreasing rice yields These interregional yield differentials diminishedover time but the technologies clearly benefited certain regions morethan others6 The introduction of modern crop varieties has exacerbatedinterregional disparities in many countries because those technologieshave often required irrigation and greater use of farm chemicals Pro-ducers in dryland areas and regions with poor infrastructure for trans-porting fertilizer have been disadvantaged Broadening the scope ofagricultural research and decentralizing the research structure shouldhelp reduce regional disparities although rates of return on researchaimed at more productive regions are consistently higher than thosefor marginal areas

Producers and Consumers The impacts of technological changeon the distribution of income between producers and consumers de-pend to a large extent on the degree to which quantity demanded re-sponds to price changes If producers face an elastic demand for theiroutput increased supplies will place little downward pressure on pricesso producers rather than consumers capture most of the benefits of theinnovation Export crops for example tend to have relatively elasticdemands and thus new technologies for the production of these com-modities tend to favor producers Many commodities that are basicstaples in the diet have relatively inelastic demands as discussed inChapter 3 The benefits of research on these commodities flow largelyto consumers through lower prices

The poor spend a higher proportion of their income on food andso benefit more than others from any decline in food prices due to re-search-induced increases in food supplies This benefit is received byboth the urban and the rural poor The rural poor are often landlesslaborers who purchase food or small owner-operators or tenants whoretain a large part of their output for home consumption Scobie andPosada found in Colombia for example that while the lower 50 per-cent of Colombian households received about 15 percent of total na-tional household income they captured nearly 70 percent of the netbenefits of the rice research program7 These benefits to consumers flow

6 JS Sarma and Vasant P Gandhi Production and Consumption of Foodgrains inIndia Implications of Accelerated Economic Growth and Poverty Alleviation In-ternational Food Policy Research Institute Research Report No 81 WashingtonDC 1990 pp 17ndash34

7 Grant M Scobie and Rafael Posada T ldquoThe Impact of Technical Change on IncomeDistribution The Case of Rice in Colombiardquo American Journal of Agricultural Eco-nomics vol 60 no1 (February 1978) pp 85ndash92


236


across regions especially where adequate transportation exists anddampen the interregional disparities to producers mentioned above

Land Labor and Capital New technologies allow the same out-put to be produced with fewer resources thus freeing up those resourcesto be used elsewhere in the economy The dual-economy model de-scribed in Chapter 6 illustrated the potential for labor released fromagriculture to become a fundamental source of industrial growth How-ever the effect of technical change on the demand for resources is in-fluenced by the inherent nature of the technology and by the nature ofproduct demand

Some new technologies result in proportionate savings of all in-puts while others save labor and use land or vice versa For example anew machine to cultivate the land may save labor and require a farmerto use more land to justify the cost A higher-yielding rice variety mayrequire more labor but produce more per unit of land If a technology isneutral with respect to its effect on land and labor use and if the de-mand for the product is elastic the demand for both land and labormay grow proportionately following adoption of the technology Thereason is that with elastic demand total revenue increases with a shiftout in the supply curve providing increased returns to all resourcesOn the other hand if product demand is inelastic a neutral technicalchange can reduce the demand for all inputs proportionately

BOX 12-2

THE GREEN REVOLUTIONThe term green revolution was coined in 1968 by William S Gaud formerAdministrator of the US Agency for International Development to describethe dramatic wheat harvests that had been achieved in 1966 to 1968 inIndia and Pakistan The term gained further publicity in 1970 when NormanBorlaug was awarded the Nobel Peace Prize for his research that pro-duced the high-yielding semi-dwarf Mexican wheats that had performedso well in Asia and Latin America At the same time that the semi-dwarfwheats were making their dramatic entry IRRI released new semi-dwarfrice with the same dramatic effect

The big innovation of the green revolution was developing varieties ofwheat and rice that would not fall down (lodge) when nitrogen fertilizerswere applied These new lines of plants also tended to be earlier maturingto produce many shoots (tillers) and to be less sensitive to day length

Source Donald L Plucknett ldquoSaving Lives Through Agricultural Researchrdquo Con-sultative Group on International Agricultural Research Issues in AgriculturePaper No 1 (Washington DC May 1991) pp 9ndash10

237

Most new technologies are biased toward the use of one resourceor another Many of the higher-yielding varieties that comprised theldquoGreen Revolutionrdquo (see Box 12-2) require significantly more labor in-put per unit of land As a result strong poverty-reducing impacts ofthe green revolution were transmitted through labor markets In coun-tries where markets are highly competitive and input prices reflect trueinput scarcity the induced-innovation model presented in Chapter 11predicts that new technologies will be developed to save the relativelyscarce resources However if input prices are distorted externalitiesexist or transactions costs are high technical change will not necessar-ily be biased in a direction that saves the scarcest resources this lsquolsquoinap-propriatersquorsquo bias will thus reduce the rate of overall agricultural growthbelow its potential

Because so many factors influence the effect of new technologieson resource use it is difficult to generalize about the effect of researchon employment on the long-run returns to land and so on One impli-cation is that agricultural research is a relatively blunt instrument forimplementing a policy of distributing income to particular resources

Nutritional Implications Agricultural research can influence hu-man nutrition through several mechanisms First if new technologiesare aimed at poor farmers a high proportion of the resulting incomestreams will be spent on improving the diet If the technologies are aimedat commodities produced and consumed at home the effect will bedirect If the technologies affect export crops produced by small farmsthe extra income may be spent on buying food from others Even if thenew technologies are suitable only for large farms producing exportcrops the influence on nutrition of the poor may be positive if the de-mand for labor increases However this employment effect is not at allcertain and depends on the factor biases discussed above

An important nutritional effect of research comes from the in-creased availability of food at lower prices As supply shifts out againsta downward sloping demand curve all consumers benefit from lowerfood prices that improve their real wages

Research can be used to reduce fluctuations in food supply pricesand income and thereby alter nutrition Some of the severest malnutri-tion occurs in rural areas during years of low incomes due to lowerthan normal production Research on drought-tolerant varieties can helpreduce production fluctuations and help lower malnutrition

It is difficult to draw conclusions about the nutritional implica-tions of a particular portfolio of research activities because the sourcesof nutritional impacts identified above can act counter to one anotherFor example a labor-saving technology used to produce export crops


238


might lower wages and not induce changes in food supply thus mak-ing landless laborers worse off Some concern has been voiced aboutthe nutrition effects of research devoted to export-crop production Ifnumerous producers switch from food crops to export crops then thereis potential for domestic food prices to rise and such a rise would hurtthe urban and landless poor However there is little empirical evidenceof this switch and nutritional levels are perhaps most influenced byresearch that generates the largest income gains particularly if thosegains are realized by low-income producers Therefore focusing re-search disproportionately on commodities with high nutritional con-tent may result in less income than if the research were focused on othercommodities For example improving the productivity of a vegetableexport crop in Guatemala may improve the familyrsquos nutrition more thanimproving the productivity of its maize crop because the former willlead to a greater increase in farm income and therefore the familyrsquosability to buy food

Environmental Effects of ResearchConcerns over environmental degradation in developing countries werediscussed in Chapter 9 Deforestation soil erosion desertification pes-ticide pollution etc have become serious problems in many countriesand research can play a significant role in their solution

First new technologies for mitigating soil erosion providing al-ternative energy sources and substituting for chemical pesticides canbe generated through research Second research can be used to designimproved government policies that provide increased incentives toadopt management practices and help sustain the integrity of the natu-ral resource base Third the higher incomes generated through research-induced productivity increases will put downward pressure on popu-lation growth in the long run Fourth higher income streams will alsoreduce the pressures to abuse the environment in the short run just toobtain food and fuel Finally income growth will create more demandfor environmental quality Thus agricultural research is critically im-portant for encouraging environmentally sound and sustainable agri-cultural growth

Research organizations have been criticized in the past for devot-ing too many resources to research related to modern inputs such asfertilizer pesticides and irrigation Excessive and improper use of theseinputs can cause environmental damage An additional criticism hasbeen that too little research is aimed at resource-conserving technolo-gies such as integrated pest management and methods for reducingsoil erosion There is some truth in these claims although research on

239

sustainable farming practices has accelerated (see Box 12-3) Also mar-ket failures tend to cause an undervaluation of environmental servicesas discussed in Chapter 9 Because of this undervaluation producersand consumers often do not demand resource-conserving technologiesIn the long run one of the best ways to combat forces leading to envi-ronmental degradation is to raise incomes and reduce poverty Researchcan be an effective means of raising incomes though in the short runmore agricultural research should perhaps be aimed at conservingenvironmental resources

Other Research IssuesInstitutional Change Much agricultural research results in new orimproved technologies that are embodied in inputs or methods of pro-duction However agricultural research can be directed toward thedesign of new or improved policies or institutional changes In otherwords agricultural research can help lower the cost of adjusting insti-tutions to the changing physical natural resource economic and bio-logical environments A static or distorted institutional environmentcan be as great a hindrance to agricultural development as can a statictechnology base

Credit policies marketing and pricing policies land tenure rulesand natural resource policies are examples of institutional arrangements

BOX 12-3

RESEARCH and the ENVIRONMENT

THE CASE of the CASSAVA MEALYBUGThe cassava mealybug was accidentally introduced from Latin Americainto Africa in the early 1970s and soon began causing severe damage tocassava crops Because some 200 million Africans depend on cassava asa staple food this damage became a deep concern

Researchers at the International Institute of Tropical Agriculture (IITA)in Africa in collaboration with those at the International Center for TropicalAgriculture (CIAT) in Latin America found a means of biological controlImportation and distribution of the parasitic wasp Epidinocasis Iopez anatural enemy of the mealybug from Latin America has led to dramaticreductions in African mealybug populations with biological methods Noextensive pesticides are required and the small-scale African farmers arefreed from a damaging pest by nature itself

Source John Walsh Preserving the Options Food Productivity and SustainabilityConsultative Group for International Agricultural Research Issues in Agricul-ture No 2 (Washington DC 1991) pp 7ndash8


240


that can be improved through research Institutional changes that im-prove the flow of market information and reduce externalities are par-ticularly important

Public versus Private Sector Research Just because agriculturalresearch is important to development does not imply that the publicsector must carry it out Typically the public sector is heavily involvedin agricultural research in both developed and developing countriesbut the private sector is heavily involved in many countries and in-creasingly so Why does the private sector not provide all the neededresearch There are three basic reasons First individual farms are toosmall to do all their own research although they often cooperate withpublic research institutions and certainly do a great deal of experiment-ing Second and most important for many types of research it is diffi-cult for one firm to exclude other firms from capturing the benefits fromthe research in other words a firm may incur substantial costs in con-ducting research but once the research is completed other firms canmake use of the results without incurring much cost Thus the firm haslittle incentive to do the research in the first place Third many types ofresearch are highly risky so that many firms are hesitant to take therisk for fear of incurring a substantial loss

Certain types of research particularly applied research related tomechanical and chemical innovations are less risky and potentiallypatentable and thus attract sizable private research activity Some typesof biological and soils research on the other hand have historicallybeen more difficult to patent and have thus been primarily conductedin the public sector However the patentability of biological researchhas increased in recent years and has played a major role in the devel-opment of new genetically modified crops and animals As a countrydevelops the research role of the private sector typically increases indeveloping and marketing improved seeds as well as in mechanicaland chemical innovations However there is often a time lag betweenthe development of public sector research and the establishment of sub-stantial private sector research activity One action that a country cantake to promote private research is to establish enforceable propertyrights (patents licenses etc) over research results not just for mechanicaland chemical technologies but for biological technologies as well

Intellectual Property Rights Intellectual property rights (IPRs)refer to legal protections granted for a defined period of time to scien-tific technological and artistic inventions Copyrights trademarkspatents plant breedersrsquo rights and trade secret laws are examples ofways that intellectual property rights are granted Legal systems differ

241

by country and hence the types extent and duration of rights grantedvary as well Patents and plant breedersrsquo rights are the most importantforms of intellectual property protection for agricultural research re-sults and technologies Over time copyrights are becoming more im-portant as well because the databases that contain information aboutplant genes can often be copyrighted

Patents are the strongest type of intellectual property as the patentholder can exclude all others from making using selling or offering tosell the invention in the country while the patent is in force (unlessothers purchase a license to use it) To be patentable an invention mustbe new useful not obvious and be disclosed so that others can pay alicense to use and replicate it Plant Breedersrsquo Rights (PBRs) grant pro-tection to crop varieties that are new distinct uniform and stable Pat-ents and PBRs give a monopoly on commercializing the invention orvariety for a defined period of time which allows the inventor or breederto recover their costs This protection therefore gives them incentives toinvent or breed that they otherwise would not have

Many developing countries are still in the process of developingand implementing an intellectual property protection system for plantsand animals Details of IPR systems vary from country to country butthose who lag behind run the danger that private firms and individualswill be reluctant to develop or sell products with new technologiesembedded in them in their countries Developing countries have grownfearful that as more and more technologies (including genes) are cov-ered by IPRs their people and firms will be discouraged from using thetechnologies and resulting products because of the high costs of licens-ing the technologies or paying for the higher-cost products This issuehas been a topic of discussion and action in multilateral trade negotia-tions since the early 1990s and is discussed more in Chapter 17

NATURE ORGANIZATION and TRANSFER of RESEARCHSome research is very lsquolsquoappliedrdquo and yields immediate practical resultsOther research is more ldquobasicrdquo or fundamental and may not yield re-sults for many years Research systems themselves are organized in avariety of different ways Letrsquos consider the major categories of agricul-tural research and organizational arrangements

Categories of Agricultural ResearchAgricultural research can be categorized into basic research appliedresearch adaptive research and testing Basic research developsknowledge with little or no specific use in mind Studies of evolutiongenetics biochemical processes and so on may discover fundamental


242


principles of substantial significance to more applied researchers butthe specific end use of the research results are often difficult to identifyprior to the research Most basic research is carried out in developedcountries or in the largest of the developing countries

Applied agricultural research is aimed at solving particular bio-logical chemical physical or social science problems affecting one ormore countries or areas in a state or region Development of new plantvarieties methods for controlling specific insects and diseases in plantsor animals and animal nutrition research are examples of applied re-search Applied research may take place at international research cen-ters or in national research systems

Adaptive research takes the results of applied research and modi-fies or adapts them to local conditions within a country or region Aplant variety developed for a broad area may need to be modified for aspecific microclimate Fertilizer recommendations methods for control-ling soil erosion and many other technologies require adaptation tothe local setting Most of this research takes place on local experimentstations or on farms

Ecuadorian scientistsrecording disease data in an

applied pest managementexperiment on plantain

243

Testing research is conducted on local experiment stations or onfarms to assess whether research results from other locations are suit-able for solving local problems Improved pesticides management prac-tices or plant varieties are examples of research results that may betested All countries conduct some testing research but for very smallcountries with limited resources testing may represent a large portionof total research Much testing is conducted by farmers themselves

These categories of research are linked and dependent on each otherA research center may be involved in several categories

BiotechnologyMuch applied and adaptive agricultural research involves what has beencalled biotechnology research Traditional biotechnology research includeswell-established techniques in plant breeding biological control of pestsconventional animal vaccine development and many other types of re-search Modern biotechnology research includes use of recombinant DNAmonoclonal antibodies and novel bio-processing techniques amongothers

Modern biotechnology provides new tools and strategies for in-creasing agricultural production The tools for improving agriculturaloutput range from novel approaches to cell and tissue culture to thegenetic manipulation of biological material Modern biotechnology isbased on several new technologies One of them recombinant DNAoften called genetic engineering enables the essential genetic material incells DNA to be manipulated It offers the possibility of transferringgenetic material from one species to another thereby transferring a use-ful genetic trait Such a transfer is also called transgenics

Another biotechnology technique monoclonal antibodies is usedto detect individual proteins produced by cells thereby providing amethod for rapid and specific diagnosis of animal and plant diseases Athird novel bio-processing technique involves new cell and tissue cul-ture technologies that enable rapid propagation of living cells Thesetechniques provide improved methods for large-scale production ofuseful compounds by the microbial or enzymatic degradation of vari-ous substrates

Modern biotechnology is also used to map out the location andfunctions of genes in individual species By identifying whether ldquomark-ersrdquo on a chromosome exist for a specific gene or genes that control atrait of interest a process called marker-assisted breeding can be used tospeed up the breeding process to incorporate a useful trait in a newvariety


244


The types of products that modern biotechnology can potentiallyproduce include new plant varieties new animal breeds plant and ani-mal growth hormones bio-pesticides bio-fertilizers diagnostic reagentsfor plant and animal diseases and enzymes and food additives Theymay improve the tolerance of plants and animals to particular pestsand stresses such as drought and increase the efficiency with whichplants and livestock utilize nutrients or increase a plantrsquos nutritionalquality (for example rice with increased vitamin A or iron) They mayreduce the need for agrichemicals

Modern biotechnologies are on the cutting edge of science and ifdeveloping countries are to be successful in developing their own mod-ern biotechnologies or adapting technologies produced elsewhere theywill need scientists trained in microbiology and biochemistry Thesecountries will need to integrate modern biotechnology into traditionalbiotechnology research programs They will need to put in place or re-fine bio-safety rules and to resolve rules on intellectual property rightsas the rights to many aspects of the technologies are patented and ownedby private companies

Benefits and Costs of Modern Biotechnology Concerns have beenexpressed by some about the health and environmental safety of mod-ern biotechnologies especially for the technologies that involve trans-ferring genes across species All technologies involve some risks andeach country needs to develop and implement a regulatory system thatallows it to test and monitor the safety of its new agricultural technolo-gies The risks associated with modern biotechnologies are thought tobe relatively low and many of the technologies can have positive ef-fects on health and the environment through effects on reducing pesti-cide use However there can be no certainty that adverse health andenvironmental effects will not occur Consumers especially in Europehave expressed strong reservations about consuming foods producedwith the use of biotechnology One concern has been the possibilitythat genes say from a herbicide-tolerant crop might transfer throughpollen to another species creating perhaps a super-weed that would bedifficult to control with a herbicide Gene transfer across species doesoccur frequently although odds of creating a super-weed are slimAnother concern is whether people may have an allergy to a transgeniccrop A third concern is whether people should be attempting to alternature although many types of agricultural research in addition to ge-netically modified organisms could be subject to this same concern

Economic concerns have also been raised with respect to whethera few companies might end up controlling many of the intellectualproperty rights associated with the genes and to the transformation

245

processes thereby gaining some monopoly power If they did gain suchpower they might charge farmers a high price for their seeds Coun-tries however can regulate companies and have their public researchsystems enter into joint ventures with the private sector to ensure free-dom of access to seeds at reasonable prices

Biotechnologies are just one of many potential means of increas-ing agricultural productivity in developing countries and perhaps thegreatest danger is that developing countries forgo the food and incomegrowth that the technologies may afford them8 In 2008 approximately125 million hectares of transgenic crops mdash about 8 percent of the totalcrop area in the world mdash were grown in 25 countries 15 of them devel-oping countries However planting of transgenic crops in Africa hasbeen limited to South Africa and Burkina Faso to date

Some have feared that the new seeds will cost too much for farm-ers in developing countries as private firms attempt to capture theirresearch costs through only selling seeds of crops that are hybrids orthat have a ldquoterminator generdquo embedded in them Hybrids or termina-tor genes would force farmers to purchase new seeds each time theyplant or the seeds will not grow Due to the concerns being raised onthis issue seed companies have not employed the terminator gene al-though they have emphasized hybrids to protect their investment Thepublic sector has also been involved in biotechnology research in manycountries to help ensure that transgenic seeds are available at a reason-able price or for open-pollinated varieties for which seeds can be savedand replanted

Several studies have documented potentially large economic ben-efits that would accrue from increased use of biotechnologies in devel-oping countries9 These benefits would be realized by consumersthrough lower food prices and through increased nutritional qualityProducers might also gain through lower costs of production If devel-oping countries do not pursue agricultural biotechnologies they maybe placed at a competitive disadvantage compared to countries that dopursue them However transgenic technologies are certainly not theonly means of improving crop productivity and many others such as

8 See Per Pinstrup-Andersen and Ebbie Schioler Seeds of Contention (Baltimore JohnsHopkins University Press 2000) for a more detailed discussion of issues surround-ing biotechnologies and developing countries

9 See for example Clive James Global Status of Commercialized BiotechGM Crops 2008ISAAA Brief No 39 (Ithaca NY ISAAA 2008) and Guy Hareau George NortonBradford Mills and Everett Peterson ldquoPotential Benefits of Transgenic Rice in AsiaA General Equilibrium Analysisrdquo Quarterly Journal of International Agriculture vol44 (2005) pp 229ndash46


246


marker-assisted breeding will also be increasingly important in the fu-ture both because they are less controversial but also because regula-tory costs related to ensuring bio-safety are lower

Organization of Agricultural ResearchPublic agricultural research systems in developing countries have avariety of organizational structures Often there is a central station andseveral substations located in different geo-climatic zones Research maybe conducted at universities but the proportion of agricultural researchconducted at colleges and universities tends to be much less than indeveloped countries such as the United States

The structure of the research system is influenced by historicalforces including among others colonial history and major foreign as-sistance projects Much agricultural research in developing countries isorganized along commodity program lines for example a maize pro-gram a rice program a wheat program or a sheep and goats programOther cross-cutting research areas such as soil fertility socioeconomicsand even plant or livestock protection may have separate programs

Some agricultural research systems have a mandate for extensionor other programs designed to reach out to farmers Even if extension isnot included in the mandate of the national research institution thatinstitution still needs a mechanism to obtain information on the currentproblems facing farmers and for testing new technologies under actualfarm conditions This mechanism may involve on-farm research

Each research system must determine the appropriate mix of on-farm and experiment-station research Experiment station research isneeded so that experiments can be run under controlled conditions thatenable particular components of new technologies to be developed andtested without the confounding of numerous and possibly extraneousfactors However the real-world robustness profitability and culturalacceptability of new technologies cannot be assessed without testingunder actual farm conditions Frequent contact between scientists andfarmers increases the likelihood that constraints and problems facingfarmers will be included in the development and evaluation of newtechnologies Because extensive on-farm interaction is expensive andscientific resources are scarce in developing countries each researchsystem assesses at the margin the appropriate mix of on-farm or on-station research

International Agricultural Research Centers The 1960s saw theemergence of a set of international agricultural research centers (IARCs)that has now grown to a network of 15 institutions located primarily inAfrica Asia Latin America and the Middle East as shown in Figure

247

12-3 The funding and operation of these ldquoFuture Harvestrdquo centers iscoordinated through the Consultative Group for International Agricul-tural Research (CGIAR) headquartered at the World Bank in Washing-ton DC Although the first center The International Rice Research In-stitute (IRRI) was founded in 1960 the international center model drewon the historical experiences of the colonial agricultural research insti-tutes that were effective in increasing the production of export cropssuch as rubber sugar and tea The model also drew on the experiencesin the 1940s and 1950s of the Rockefeller Foundationrsquos wheat and maizeprograms in Mexico and the Ford and Rockefeller foundationsrsquo rice pro-gram in the Philippines The results of the research and training programsof the centers are aimed not just at the country where the center is locatedbut at the neighboring region or even the world

The first IARCs IRRI and CIMMYT (International Center for Maizeand Wheat Improvement) produced new varieties of rice and wheatthat substantially increased yields especially for rice in Asia The firstof several rice varieties (IR-8) released by IRRI and cooperating na-tional programs responded to high rates of fertilizer and water appli-cation by producing more grain and less straw Subsequent researchhas focused as well on improving grain quality incorporating diseaseand insect resistance and developing varieties for drier upland areasThe substantial yield boost experienced in parts of Asia in the late 1960sresulting from these new technologies was termed the Green Revolu-tion (see Box 12-2)

The success of the green revolution in increasing yields and in-comes in many areas led to the expansion of the international agricul-tural research center concept to the other commodities and regions iden-tified in Figure 12-3 Maize millets tropical legumes cassava livestockpotatoes and many other commodities have received emphasis Theresearch results from these newer centers have not been as spectacularas the early gains in rice and wheat but these centers too have madesignificant contributions For example disease-resistant beans cassavaand millet varieties are now being grown in several countries Thesecenters also provide a public link between research being undertakenin the private sector on modern biotechnology and national agricul-tural research systems in developing countries to help ensure that thesenational systems are not left behind

To some extent the dramatic breakthroughs in yields in the earlyyears of the green revolution created unrealistic expectations that thesegains would be repeated with regularity Agricultural research is infact a continuous process that generally produces small gains from yearto year


248

The overall program and core funding for all 15 centers is man-aged by an organization called the Consultative Group for InternationalAgricultural Research (CGIAR) whose members include the WorldBank the Food and Agricultural Organization of the United Nations(FAO) the United Nations Development Program (UNDP) and sev-eral national governments regional banks and foundations These in-stitutions provide the funds for the centers The CGIAR founded in1971 is centered at the World Bank The total budget for the 15 FutureHarvest Centers was $520 million in 2007 when all funding sources areconsidered In addition to these centers there are a few related interna-tional research centers that play a similar role such as the World Veg-etable Center in Taiwan and the International Center for Insect Physi-ology and Ecology in Kenya


Figure 12-3 The ldquoFuture Harvestrdquo International Agricultural ResearchCenters (See facing page)

249


Research Center ndash See Figure 12-3 Research Coverage

Africa Rice (formerly WARDA) Rice and rice-based cropping systems in Africa

Bioversity (formerly IPGRI) Conservation of plant genetic materialbananas and plantain

CIAT mdash Centro Internacional de Phaseolus beans cassava rice Agricultura Tropical tropical pastures

CIFOR ndash Centre for International Forest systems and forestry Forestry Research

CIMMYT ndash Centro Internacional Wheat barley maize de Mejoramiento de Maiz y Trigo high-altitude sorghum

CIP ndash Centro Internacional Potato sweet potato other root crops de la Papa

ICARDA ndash International Center for Crop and mixed farming systems Agricultural Research in research with emphasis on sheep Dryland Areas wheat barley broad beans

ICRISAT ndash International Crops Sorghum pearl millet pigeon pea Research Institute for chickpea groundnuts the Semi-Arid Tropics

IFPRI ndash International Food Policy Food Policy Research Institute

IITA ndash International Institute for Farming systems Cereals grain Tropical Agriculture legumes roots and tubers

ILRI ndash International Livestock Livestock diseases and production Research Institute systems

IRRI ndash International Rice Research Rice Institute

IWWI ndash International Water Irrigation Management Institute

World Agroforestry Agroforestry

World Fish Center Fisheries and other living aquatic resources

Transfer of Research ResultsThe discussions of research categories of national and regional experi-ment stations and on-farm research and of international agriculturalresearch centers all imply that research results may be transferred fromone location to another These transfers can occur internally in a coun-try or across national boundaries Let us examine the possibility andadvisability of transferring new technologies or institutions

250

10 See Yujiro Hayami and Vernon W Ruttan Agricultural Development An InternationalPerspective (Baltimore Johns Hopkins University Press 1985) pp 260ndash62

11 See Robert E Evenson and Hans P Binswanger ldquoTechnology Transfer and ResearchResource Allocationrdquo in Hans P Binswanger and Vernon W Ruttan eds InducedInnovation Technology Institutions and Development (Baltimore Johns HopkinsUniversity Press 1978) chapter 6 This section draws heavily on the ideas in Evensonand Binswanger


Prior to the 1960s little attention was focused on the importanceof indigenous agricultural research in developing countries It wasthought that the possibilities for transferring technologies from devel-oped countries were substantial and that therefore extension programswere needed to assist in this transfer The relative lack of success withdirect transfer of machinery plant varieties and other materials fromdeveloped to developing countries led to the realization that improveddeveloping-country research capacity was essential The desire to im-prove location-specific research was one of the driving forces behindthe development of the IARCs mentioned above However many re-search results are regularly transferred from one country to anotherWhat types of research results are transferable and what determinestheir transferability

Materials such as improved seeds plants and animals scientificmethods formulas and designs genes and basic research output areall potentially transferable to some extent10 Each country must decidewhether to simply screen these items and attempt to directly transferthem to screen them and then modify and adapt them to their ownenvironment or to undertake a research program that is comprehen-sive enough to produce its own technologies11

The choice among these transfer and research options will dependfirst on the relative costs of direct transfer of technology and of adap-tive and comprehensive research Transfer of research results involvescosts of information and screening or testing There may also be licensecosts or fees for patented items Most of these transfer costs increasewith the physical size and environmental diversity of the country Acountryrsquos own research costs are somewhat independent of size forthat reason it may be more cost effective for larger countries to con-duct their own research than for smaller countries

Second the complementarity between screening transferred tech-nologies and conducting in-country research can come into play It takessome scientific capacity just to bring in and screen research results fromoutside the country Therefore it may be cost-effective to have thesescientists do some of their own adaptive research

251


Third if the natural resource base in one developing country issimilar to that in another country where the new technology is pro-duced then the chances of transfer will increase New wheat varietiesfor example are often transferred from Argentina to Uruguay becausethose countries have similar wheat-growing regions These similaritiestend to reduce the cost of transfer and to increase the likelihood that thetransferred technology will be physically and economically viable

Fourth some technologies are more environmentally sensitive thanothers are For example new plant and animal materials may be moreenvironmentally sensitive than more basic research results formulasdesigns etc The International Agricultural Research Centers attemptto produce plant and animal materials that have broad environmentalsuitability In many cases it is necessary for the receiving country tothen adapt these materials more specifically to its microclimates Rela-tively basic advances in modern biotechnology have the potential forwidespread applicability if the scientific and institutional capacities arecreated in developing countries to enable them to effectively utilize theresearch results

Fifth the availability of research results to transfer in is also im-portant For example if a country has low labor costs and high capitaland land costs yet the technologies available to transfer in are largemachines suitable for a resource environment with high labor costs and

On-farm potato variety trial of the International Potato Center (CIP)

252


abundant land then the country will not find the outside technologysuitable

In summary a developing country must assess several factors indeciding whether to transfer in research results from another countryor from an international center Agricultural research is a long-terminvestment Research takes time adoption of new technologies takestime and research results eventually depreciate as insects and diseasesevolve the economic environment changes and so on Developing coun-tries often attempt to bring in research results from other countries dur-ing the early stages of development in order to shorten this process andmeet critical needs Perhaps a 1 percent productivity growth rate canbe accomplished through a relatively simple transfer process thoughsuch productivity will depend on the conditions previously mentioned12

However the requirements of modern rates of growth in food demandoften in the 3 to 6 percentage range require the coexistence of at leastsome indigenous agricultural research capacity and this capacity maybe a combination of public and private

Agricultural development today requires a research system withinternal and external linkages that bring in appropriate technologiesscreen adapt and produce new technologies and institutions and per-form both on-station and on-farm testing The major components ofsuch a research system are illustrated diagrammatically in Fig 12-4National and local experiment stations must interact with on-farm re-search and extension This national research system also must maintainties with the international research centers Research in the larger na-tional systems feeds into both the international centers and the smallernational research systems If any of these linkages is weak or missingagricultural productivity growth will be slowed

Agricultural Research SpendingSpending on agricultural research occurs in both the public and privatesectors In the developing countries the public sector undertakes morethan 90 percent of agricultural research with the bulk of that researchoccurring in the Asia and Pacific region (see Table 12-3) In 2000 morethan $23 billion was spent in developed and developing countries onpublic agricultural research with roughly a third ($75 billion) of thoseexpenditures occurring in the developing countries in the Asia and Pa-cific region In contrast only a little over 6 percent of the total was spentin Africa and the percentage spent there has been declining since 1980Total spending on agricultural research in Africa has increased only


253


TABLE 12-3 Total Public Agricultural Research Spending by Region

Agricultural Shares inRampD spending global total

(millions 2000 dollars) (percentages)

1981 2000 1981 2000

Asia and Pacific 3047 7523 200 327 (28 counties)

Latin America and 1897 2454 125 108 Caribbean (27 countries)

Sub-Saharan Africa 1196 1461 79 63 (44 countries)

West Asia and North Africa 764 1382 50 60 (18 countries)

Subtotal developing countries 6904 12819 454 558 (117 countries)

Subtotal high income countries 8293 10191 546 442 (22 countries)

Total (139 countries) 15197 23010 1000 1000

Source CGIAR Science Council Science for Agricultural Development ChangingContexts and New Opportunities (Rome Italy Science Council Secretariat 2005)

Figure 12-4 Components of a well-linked agricultural research systemfor developing countries

254


about one percent per year over the past several years despite increasedmalnutrition in the region13

Agricultural research has become increasingly concentrated in ahandful of countries worldwide14 The United States Japan France andGermany accounted for more than two-thirds of the agricultural re-search in developed countries in 2000 while China India Brazil Thai-land and South Africa accounted for more than half of the developingcountry total If private support for agricultural research is includedthe disparities in funding identified above are even sharper with Af-rica accounting for less than one percent of total funding on agricul-tural research15 These numbers place increased importance on the tech-nology transfer issues raised above

ROLE of EXTENSION EDUCATIONCountries unable to develop the skills and knowledge of their farmersand their families find it difficult to develop anything else The utiliza-tion of new technologies and institutions is critically dependent on aworkforce that is aware of them and understands how to use themAgricultural extension education can help motivate farmers towardchange teach farmers improved decision-making methods and pro-vide farmers with technical and practical information Extension iscomplementary to other sources of information because it speeds upthe transfer of knowledge about new agricultural technologies and otherresearch results It helps farmers deal with technological and economicchange Thus as agriculture in a country moves from a traditional to amore dynamic science-based mode the value of extension educationincreases

In extension education farmers are the primary clientele and theprograms are mostly oriented toward production problems they faceExtension accelerates the dissemination of research results to farmersand in some cases helps transmit farmersrsquo problems back to research-ers Extension workers provide training for farmers on a variety of sub-jects and must have technical competence economic competence farm-ing competence and communication skills Thus extension workersrequire extensive training and retraining to maintain their credibilitywith farmers

13 CGIAR Science Council Science for Agricultural Development14 CGIAR Science Council Science for Agricultural Development15 See Philip G Pardey Nienke Beitema Steven Dehmer and Stanley Wood Agricul-

tural Research A Growing Divide (Washington DC IFPRI 2006) p 1

255


Organization of ExtensionMany types of organizational structures for extension exist in develop-ing countries A highly structured approach encouraged by the WorldBank and applied in several countries is called the training and visit (TampV)system The TampV system includes a single line of command a set sched-ule of visits to farmersrsquo groups regular and continuous training of ex-tension officers and workers by subject-matter specialists and no non-extension responsibilities16 The TampV system facilitates discipline ac-countability and research linkages and experienced apparent successin some countries for a period of time

Another more common extension structure is the village agentmodel that assigns extension ldquoagentsrdquo to live in villages and provideone-on-one and group training of farmers on a variety of agriculturaltopics An example that illustrates this structure is the extension ser-vice of the Colombian National Coffee Federation That service has ex-tension agents who operate on a fixed schedule of visits to farmersrsquogroups and who spend one day a week in an office receiving farmersand scheduling individual farm visits that coincide with days whenthey are visiting a particular location Village extension agents are sup-ported by regional subject matter specialists who also spend most oftheir time visiting farmersrsquo groups and individual farms Village exten-sion agents are drawn from coffee farms and receive three years of train-ing after high school Extension programs are planned six months aheadand are developed jointly between the farmersrsquo group and the agent

Unfortunately both the TampV and the village agent structures forextension have an uneven history of success The TampV system suffersfrom its high cost and the disadvantage of not having local agents whocan respond to farmer concerns as they arise The village system suffersfrom the difficulty of funding a sufficient number of agents and ad-equately supporting them with supervision and training Too often ex-tension agents are poorly trained and little-motivated They may notvisit enough farms and they become diverted into non-extension ac-tivities The extension service itself may become politicized corruptand unconnected to research A well-functioning system needs clearlines of authority adequate training and financial rewards for person-nel or the system becomes relatively ineffective Research and exten-sion linkages are also essential and are facilitated if research and extensionare housed in the same institution Unfortunately often they are not

16 See Daniel Benor James A Harrison and Michael Baxter ldquoAgricultural ExtensionThe Training and Visit Systemrdquo World Bank Washington DC 1989 for moredetails

256


In recent years many public extension services especially in LatinAmerica have been eliminated or seen their funding cut drasticallyThese cuts were caused by a combination of budgetary pressures andperceptions that the extension services were not particularly effectiveAs a result of these and other inadequacies in publicly supported ex-tension systems non-governmental organizations (NGOs) are increas-ingly involved in agricultural extension NGOs exist outside financialsupport from governments with support from private individuals andgroups in other countries or on private local support In addition pri-vate firms that sell products such as improved seeds and chemicals areheavily involved in technology transfer associated with their specificproducts

Extension MethodsA variety of methods are employed to transfer research knowledge andtechnologies to producers Individual farm visits regularly scheduledgroup meetings technology demonstrations that may involve a fieldday when hundreds of farmers are invited to observe the latest researchresults and transfer of information through mass media are just someof the methods Some technologies are transferred more effectivelythrough intensive methods such as regular meetings other are ame-nable to transfer through less intensive (and usually less expensive)methods such as field days and mass media Each country must decidewhat is most cost effective for its public extension system and eachNGO will decide which approach allows it to best achieve its objec-tives There is no one method that works best in every situation Exten-sion costs and effectiveness will depend on the type of technology ty-pography of the country access to mass media cultural and social fac-tors and many other variables

SUMMARYAgricultural research generates new or improved technologies and in-stitutions that increase agricultural productivity moderate food pricesgenerate foreign exchange and reduce pressures on the natural resourcebase Most studies have found the economic returns on public agricul-tural research investments to be high Agricultural research can havedistributional effects by farm size and tenure by region by income levelby factor of production and so forth Consumers particularly low-income consumers are major beneficiaries of agricultural research asthe poor may spend 80 percent of any income increases on food andfood prices tend to fall as productivity increases Agricultural researchcan influence nutrition by raising farm incomes lowering food prices

257


and reducing the variability in food production Agricultural researchcan generate technologies institutional changes and higher incomesthat lead to reduced pressures on the environment The public sectorhas a role to play in agricultural research because the private sector hasinadequate incentives to conduct a sufficient amount of socially benefi-cial research in part because often private firms conducting researchcannot capture enough of the benefits Intellectual property rights canhelp in creating incentives for private research investment

Agricultural research can be classified into basic applied adap-tive and testing research These categories are linked and dependenton each other Research is conducted on national and local experimentstations and to be effective must contain an on-farm component Since1960 a system of International Agricultural Research Centers (IARCs)has provided new technologies and institutional changes suitable toseveral developing countries These institutions helped to produce agreen revolution that greatly increased the production of maize riceand wheat Research can be transferred across national borders but theease of transfer depends on the type of research the relative cost oftransfer and indigenous research the natural resource base and otherfactors Use of modern biotechnology has grown around the world inrecent years but is yet to be widely adopted in developing countries

Many types of extension systems exist some more structuredthan others Training for extension workers incentives clear lines

Extension field day in Peru

258


of authority and strong linkages to research are each critical for aneffective extension service

IMPORTANT TERMS and CONCEPTSAdaptive research Green revolutionAgricultural education Intellectual property rightsAgricultural extension International agriculturalAgricultural productivity research centersAgricultural research Scale-neutral technologyApplied research Technology transferBasic research Testing researchBiotechnology Training and visit systemExperiment stations

Looking AheadThis chapter considered technical factors that can influence develop-ment of the agricultural sector The following several chapters addresssets of institutional issues that are equally important if agriculture is toprogress in developing countries We begin in the next chapter discuss-ing land and labor policies

QUESTIONS for DISCUSSION1 What is the purpose of agricultural research in developing coun-

tries2 How does research influence agricultural productivity and food

prices3 Under what conditions might research on a nonfood export crop

have as much or greater positive effect on nutrition than researchon a food crop

4 Why might agricultural research tend to benefit large farms morethan small farms

5 Why might agricultural research increase the regional disparity inincome in a developing country

6 Why are consumers especially poor consumers often the majorbeneficiaries of agricultural research

7 What factors influence the returns to particular factors of produc-tion following research

8 How might agricultural research help improve the environment9 How might research result in institutional change10 Why should the public sector get involved in research Why not

leave it to the private sector

259


11 Distinguish among basic applied adaptive and testing research12 What is modern biotechnology13 What are the International Agricultural Research Centers and

how does their work tie into the agricultural research systems indeveloping countries

14 What is the ldquogreen revolutionrdquo when did it occur and where15 What role does extension play in agricultural development16 How might research education and extension be complementary

activities17 How can intellectual property rights influence production of

agricultural technologies

RECOMMENDED READINGSAlston Julian M George W Norton and Philip G Pardey Science Under

Scarcity Principles and Practice for Agricultural Research Evaluation andPriority Setting (Ithaca NY Cornell University Press 1995)

Benor Daniel James Q Harrison and Michael Baxter ldquoAgricultural Ex-tension The Training and Visit Systemrdquo World Bank Washington DC1989

CGIAR Science Council Science for Agricultural Development Changing Con-texts and New Opportunities Rome Italy Science Council Secretariat 2005

Masters William A ldquoPaying for Prosperity How and Why to Invest inAgricultural Research and Development in Africardquo Journal of Interna-tional Affairs vol 58(2) 2005) pp 35ndash64

Pardey Philip P Nienke Beitema Steven Dehmer and Stanley WoodAgricultural Research A Growing Divide (Washington DC IFPRI 2006)

Pinstrup-Andersen Per and Ebbe Schioler Seeds of Contention (BaltimoreJohns Hopkins University Press 2000)

Ruttan Vernon W Agricultural Research Policy (Minneapolis Universityof Minnesota Press 1982)

Scobie Grant M and Rafael Posada T ldquoThe Impact of Technical Changeon Income Distribution The Case of Rice in Colombiardquo American Jour-nal of Agricultural Economics vol 60 February 1978 pp 85ndash92

260

CHAPTER 13

Land and Labor Markets

The distribution of rights in land relates to the distribution of powerincome social status and incentives A land reform that changesthis distribution is by definition a change that shakes the roots andnot the branches of a society mdash Philip M Raup1

THIS CHAPTER1 Discusses the meaning of land tenure and land reform2 Explains why land reform and flexible land tenure systems are

often necessary for agricultural development yet difficult toachieve and what the requisites are for a well-functioning landmarket

3 Describes the nature of agricultural land and labor markets indeveloping countries

MEANING of LAND TENURE and LAND REFORMLand and labor are fundamental inputs into agricultural productionand while land is often distributed unequally labor is not Thereforewe see large farms with land concentrated in the hands of a few andsmall farms with excess labor Typically a market develops in whichlabor is hired to work on larger farms or land is leased to small-scalelandholders for rent or for a share of the output An alternative is tosubdivide large holdings through land reform or market-based redis-tribution efforts In this chapter we consider determinants and conse-quences of alternative land tenure systems and labor market structuresWell-functioning land and labor markets are crucial to agricultural de-velopment because land is a major input into production and poorly

1 Philip M Raup ldquoLand Reform Issues in Developmentrdquo Staff Paper P75-27 Depart-ment of Agricultural and Applied Economics University of Minnesota St Paul1975 p 1

261

functioning markets will lead to misallocation and inefficient use ofthis valuable resource Evidence shows that the rural poor particularlythose with little or no land will benefit more from an additional unit ofland than will the rich mechanisms to reallocate land can increase pro-ductivity and reduce poverty

Land rights determine social and political status as well as eco-nomic power in developing countries Secure access to land can en-hance incomes provide an important insurance function and increaseaccess to financial and non-financial services Land tenure is a term usedto refer to those rights or patterns of control over land Land rightsinclude rights to use and to exclude use rights to output from the landand rights to transfer the land or its output to others

As population density increases farming techniques change andmarkets for agricultural products grow pressures often develop tochange existing land tenure arrangements In societies where land hasbeen held in common permanent and enforceable individual rights toland may evolve In countries where ownership patterns are highlyskewed with a few people owning much and many owning little or noland pressures often are exerted on the government to undertake a landreform or eliminate constraints to more equal land distribution by es-tablishing well-functioning land markets These pressures may arisefrom peasants who desire increased economic well-being or from thosein power who hope that minimal concessions to the peasants will dif-fuse political unrest A land reform is a dramatic attempt to change theland tenure system through public policies Land reform may changenot only rights and patterns of control over the land resource but alsothe mode of production (whether semi-feudalistic capitalistic or so-cialist) and the agrarian class structure Consequently few subjects re-lated to agricultural development are as controversial In recent yearsmore attention has been focused on rights to land and how secure rightsfacilitate development of functioning land markets Market-based mea-sures have supplanted administrative approaches to land reallocations

Land Ownership and Tenure SystemsA wide array of land ownership and tenure systems exists in the worldThese systems reflect differences in historical influences levels ofincome culture political and legal systems climate and other factorsThe systems vary in size and organization of land holdings they affectincentives to produce and invest and they influence the distribu-tion of benefits from agricultural growth Examples of average size oflandholdings from around the world are presented in Table 13-1 Thelarger holdings in Latin America compared to Asia and Africa are


262


particularly evident However information on average land holdingsmasks important difference within countries these differences areshown in Table 13-1 as gini coefficients2 While average holdings forexample in Latin America are quite high many landless and near land-less families can be found in rural areas of the region Latin Americahas the most unequal distribution of land in the world while the distri-bution in Asia and Africa is relatively equal (see Table 13-1) In LatinAmerica as elsewhere in the world the colonial past still influencesland ownership patterns today (see Box 13-1)

Family farms corporate farms state farms and group farms aremajor types of farm ownership but organization of farm enterpriseswithin these types can vary substantially In many cases the owner ofthe farm is also the operator In other cases those who operate or workon the farm may earn a fixed wage or pay rent in cash or in a share ofthe farm output to the owner

Small subsistence or semi-subsistence family farms are commonin developing countries Families often provide most of the labor andcultivation is labor-intensive Much of the output is consumed on thefarm where it is produced However not all small family farms aresubsistence or semi-subsistence farms many are commercial farms pro-ducing substantial surpluses for sale Those farmers that do consumemost of what they produce are usually very poor In some cases familymembers work on other farms or in non-farm employment The lattercan lead to the small farms becoming part-time operations especiallyas development proceeds over time with job opportunities growing inthe non-farm sector

Large-scale commercial family farms sell most of what they pro-duce While in developed countries these farms are highly mechanized

2 The gini coefficient is a widely used measure of inequality that ranges from 0 (com-plete equality) to 1 (complete inequality)

Table 13-1 Median Holding Size by Region

Region Median Holding Gini Coeffient Size (Ha)

East Asia 207 51Sub-Saharan Africa 218 49South Asia 232 59Mideast and North Africa 605 66Eastern Europe 869 62Latin America 1770 81

263

BOX 13-1

COLONIALISM and LANDOWNERSHIPMany of the landownership patterns found in developing countries are thevestiges of colonial rule The latifundia or extensive large-scale farms thatcurrently exist in Central and South America alongside minifundia or verysmall farms are a direct descendent of colonial rule The Spanish andPortuguese colonizers allocated large tracts of land to elites who formedtropical plantations or large haciendas Both types of landholding were madepossible through the direct enslavement of indigenous populations theimportation of slaves from Africa or the encomienda system that gaveindirect control over local populations to certain elites

Some of the richest agricultural lands in Africa have landownershippatterns that were established during the periods of European coloniza-tion Because European countries coveted exotic tropical products suchas cocoa coffee tea and tropical fruits agricultural production in Africawas reorganized to help ensure production of these products Large land-holdings were allocated to European settlers such as the tea and coffeeplantations in eastern Africa rarely were the landrsquos original inhabitants com-pensated In many instances the landrsquos original inhabitants were resettledto areas with lower agricultural potential poor rainfall and inadequate in-frastructure Areas that had been self-sufficient in food production becameexporters of goods to Europe while much of the indigenous populationrelied on rain-fed agriculture in marginal areas An adequate labor supplywas maintained sometimes through enslavement and sometimes througheconomic coercion

In Asia colonial rule led to similar forms of plantation agriculture Japa-nese colonies in Korea and Taiwan produced for export to Japan the Dutchcolonized Indonesia Spanish plantations existed in the Philippines theBritish colonized much of the Indian sub-continent and other regions

Following the end of colonial rule many of these landownership pat-terns persisted because of the political powers of the landed elite Someof the land reforms undertaken prior to 1970 were designed to remove theless desirable aspects of these landholding patterns Implicit forms of en-slavement of labor such as through the maintenance of indebtednesswere prohibited In many countries the result of these reforms has been toreduce labor use increase mechanization and leave the distribution ofland largely unchanged The legacy of colonial landholding patterns hasbeen pervasive rural poverty in many regions of the world


and often involve only a small amount of non-family labor in develop-ing countries the operations are usually more labor-intensive and use ahigh proportion of hired labor The owner frequently does not live onthe farm but pays a manager to oversee day-to-day operations

264


Corporate farms often produce a limited number of commoditiesin large-scale units These farms may have their own processing andmarketing systems This type of farm is more prevalent in developedthan in developing countries but there are numerous examples of largecorporate farms in developing countries The fruit plantations found inCentral American countries banana plantations of the Philippines andcocoa plantations of West Africa are a few examples

State farms are usually large owned and operated by the govern-ment and run by hired labor Managers are responsible to a govern-ment-planning agency that may set targets for production and directthe timing and method of key farming operations Examples have ex-isted recently in parts of China and the former Soviet Union State farmsusually suffer from inadequate incentives and ill-advised managementdecisions

Group farms are communes kibbutzim collectives or othertypes of farms that are operated by a group of people who work andmanage the farm jointly These group operations may also involve non-agricultural activities Often collectivized farms are characterized byover-investment in labor-saving capital-intensive technologies since in-dividuals do not receive the full returns from their labor Special ar-rangements may be devised (for example a point system) to provideincentives for individual members to work harder The kibbutzim ofIsrael are an example of a group farm system Cooperative farms exist insome parts of the world but cooperative purchase of inputs and mar-keting of outputs is a more common organization The Mennonites inthe Paraguayan Chaco are an example of privately held land whoseowners organize cooperatives for input purchases and productmarketing

Not only do many types of land ownership and organization ex-ist but also types of tenancy or leasing arrangements Farm familiesmay lease all or a part of their land for a specified amount of cash or fora share of the production from the land A farmer may be allowed tofarm a piece of land in exchange for his or her labor on another part ofthe ownerrsquos land In some countries the village tribe or national gov-ernment may own the land and grant use rights to individual familiesThis system is common in Africa where social groups allocate land toindividuals who maintain control over it and its output as long as theycultivate it

Tenancy arrangements affect the risk and transactions costs borneby tenants and landlords and influence incentives to work or applyinputs A share lease for example spreads the production risk betweenthe landlord and tenant while a cash lease concentrates the risk on the

265

tenant A cash lease implies lower transactions costs for the landlordthan a share lease since the amount received under the share lease hasto be measured and production has to be monitored A tenant mayhave less incentive to apply additional fertilizer or even labor under ashare lease than under a cash lease To circumvent this disincentivethe landlord may share the cost of the fertilizer or place conditions onthe amount of labor applied In such cases the landlord bears the trans-actions costs associated with monitoring input use and measuring thevalue of output Thus the use of a particular land- or labor-contractingmechanism may be a response to the presence of risk or transactionscosts These factors can explain why the land market may not dictate asingle type of tenancy system even within a single country (see Box 13-2)

Types of Land Tenure ReformBecause many types of land tenure systems exist in the world there aremany types of land tenure reform Prior to the 1970s many if not mostland reforms involved a movement away from feudalistic and semi-feudalistic land tenure arrangements toward capitalist or socialist own-ership modes3 Feudalism was characterized by large-scale estates con-trolled by the traditional landed-elite with labor bonded to the estatesthrough peonage or extra-economic forms of coercion

Anti-feudal land reforms have eliminated feudalism in most ofthe world and the farm types described above have replaced feudal

Cowsfeedingat aKibbutzin Israel

3 See Alain de Janvry ldquoThe Role of Land Reform in Economic Development Policiesand Politicsrdquo American Journal of Agricultural Economics vol 63 (May 1981) pp 384ndash92


266


BOX 13-2

TENANCY RISK and TRANSACTIONS COSTS THE CASE of

SHARECROPPINGSharecropping is a widely practiced form of tenancy whose existence

can be attributed to risk sharing and transactions costs Because agricul-tural production is risky and both tenants and landowners desire to sharerisks sharecropping represents a compromise between fixed-rent con-tracts where the renter bears all the risk and wage employment wherethe landowner bears all the risk Sharecropping also represents a responseto the costly supervision of workers Since under a wage system the workerreceives wages based on hours worked rather than effort expanded thereis a tendency to shirk Supervision is necessary yet costly Sharecroppingreturns some of these incentives to the tenant and also allows risk sharing

models In many countries however this post-feudal order has resultedin some large capitalist farms or estates controlled by an elite well-to-do class and a coexisting small-farm sector In a few countries (for ex-ample South Korea and Taiwan) the post-reform agricultural sectorconsists primarily of small family farms And in a few such as Cubasocialist farms still predominate The form of the post-reform agrarianstructure depends largely on the motivation and political ideology be-hind the reforms

Land tenure reform today generally does not refer to the types ofanti-feudal reforms instituted in many countries prior to the 1970s Inthose reforms prohibition of bonded labor and reductions in labor ex-ploitation were achieved but in many cases a significant redistributionof land was not As de Janvry notes countries like Colombia Ecuadorand India had successful anti-feudal land reforms but very little redis-tribution of land4 Land tenure reform as a policy issue today usuallyrelates to seeking a shift in the distribution of lands from large to me-dium-size and smaller landholdings It also involves creation of moresecure rights to land Improved security empowers households to makebetter decisions more effectively manage risks and participate on amore equal basis in markets Land tenure reform often involves mar-ket-based efforts to increase access to land and well-defined securerights to land are needed for a well-functioning land market

In the few remaining countries where socialist or group farms pre-dominate (as opposed to capitalist farms of whatever type) future landreforms may involve a transition to increased capitalism as these coun-tries struggle with the incentive problems that have plagued many types

4 Alain de Janvry ldquoThe Role of Land Reform in rdquo

267


of group farms (see Box 13-3) Land reforms in socialist countries aredifficult to achieve without a fundamental restructuring of the politicalsystem The change in China from the socialized agricultural system tothe market-based Household Responsibility System in 1979 was accom-panied by political and economic upheaval

Transactions Costs and the Agrarian StructureNo form of land tenure is universally efficient Differences in naturalresource endowments in the availability of new technologies and ininstitutional arrangements all influence risk transactions costs and thefarmerrsquos opportunity to exploit his or her managerial ability If therewere well-defined private property rights and a reasonably equitabledistribution of land perfect information and zero transactions costs(especially the cost of enforcing contracts) markets would work per-fectly and it would not matter as much what type of agrarian struc-ture prevailed Bargaining would occur among landowners rentersand laborers neither the returns to labor nor the overall economic effi-ciency of the agricultural system would depend on the type of agrarianstructure

In the real world however risk varies from country to countryMarkets are not perfect The cost of acquiring information and of nego-tiating monitoring and enforcing contracts can be high People arewilling to exploit others labor hired on a time-rate basis may shirk (in-creasing the cost of supervision) the price of land may decline as farmsize grows (due to fixed costs associated with land transactions) andlarger landowners may have better access to markets and information

Many of these risk and transactions cost factors confer an economicadvantage to large farms Owners of larger holdings can gain addi-tional political advantage through collective action and can reinforcetheir advantage through the tax laws and pressures on the types of newtechnologies produced by the public research system Owners of largerholdings have easier access to agricultural credit because the costs ofadministering a loan can be spread over more land thus making thecost per hectare of large-scale loans lower than small-scale loans Theresult can be additional gains for the elite but reduced economic effi-ciency for the agricultural sector and the country as a whole Land ten-ure reform may be needed in these cases

ACHIEVING SUCCESSFUL LAND REFORMA country can desire land tenure reform for a variety of economic so-cial and political reasons yet land reform whether it involves changein land tenancy or ownership is always difficult to achieve Letrsquos

268


examine briefly why land redistribution may be desired why it may bedifficult to achieve how a country can measure whether a reform hassucceeded and what factors improve the chances of achieving success-ful land tenure reform

BOX 13-3

LAND REFORM IN EASTERN EUROPEFollowing the collapse of Soviet-style models of central economic planningand control and the movement toward democracy in the late 1980s gov-ernments in Eastern Europe were faced with the problem of how to reformtheir agricultural sectors The organization of the agricultural sectors inthese countries was rather similar approximately one-third of the farmswere state farms and two-thirds were collectives (cooperatives) Most farmemployees managed a household plot of about one-half hectare while thestate farms and collectives were large about 2000 to 3000 hectares Twopaths of reform are illustrative of general trends in the region Romaniaand Bulgaria

In both countries the rights of landowners prior to collectivization wererecognized by parliamentary decree in February 1991 These decrees alsoestablished procedures for reclaiming these property rights In Romanialand redistribution proceeded quickly Local land commissions were estab-lished to hear household claims for up to 10 hectares Some proof of theclaim was needed Whenever possible claimants were given back theland actually owned and when not an alternative of equal size and qualitywas returned Once in possession the owner could sell it immediately orpurchase more land Thus a market for titled land with very few institu-tional restrictions was established There was not an attempt to createfarms of optimal size

The Bulgarian redistribution proceeded much more slowly Adminis-trative delay hindered progress and local commissions were very slow informing The laws implementing the distribution were very rigid and theconstruction of ldquoappropriate size holdingsrdquo through administration was at-tempted The local commissions adjudicated claims but a planning teamreassigned plots The law prohibited the purchase and sale of land forthree years which hindered development of a land market

In both cases most of the new landowners remained integrated intothe collective management system In Romania the formation of a landmarket opened a period of holdings consolidation and resale but actualexit from the collective was delayed until the infrastructure for individualmanagement was developed The slowness of the redistribution in Bul-garia guaranteed the existence of collective systems for many years

Source Karen Brooks J Luis Guasch Avishay Braverman and Csaba CsakildquoAgriculture and the Transition to Marketrdquo Journal of Economic Perspectives

vol 5(4) Fall 1991 pp 149ndash62

269

5 See Dwayne Benjamin ldquoCan Unobserved Land Quality Explain the Inverse Produc-tivity Relationshiprdquo Journal of Development Economics vol 46 (1995) pp 51ndash84


Need for More Equitable Access to LandThe broad economic and development goals of most societies includedesires for improved income growth (efficiency) equity (income distri-bution) and security (political and economic stability) A more equi-table access to land and more secure rights to land can contribute to allthree of these goals

A skewed distribution of landholdings can hamper economic effi-ciency for several reasons Large landholdings may not be farmed in-tensively even in very densely populated countries in fact an inverserelationship between farm productivity and farm size has been foundin many developing country settings5 Some landowners hold land forspeculative reasons Others are absentee landlords who provide littlesupervision of those working on the farm If the farm is owned by thegovernment planning and management may be centrally and poorlycontrolled and individual incentives may be stifled since farms areforced to respond to output and input quotas Large farms may substi-tute machinery for labor exacerbating an unemployment problem Largefarmers facing labor supervision problems often demand capital-ntensive innovations from the agricultural research system As a resultnew technologies are generated that do not reflect the true scarcity val-ues of land labor and capital in the country

Countries with large landholdings often have a coexisting sectorof farms that are too small to provide an adequate living These verysmall holdings of one or two hectares or less may have labor employedto the point at which its marginal product is very low Thus reducingthe size of large farms and increasing the size of very small farms maybe the only way to raise the marginal product of labor in agricultureand thereby raise income per worker

As discussed earlier other land tenure problems including theneed for tenancy reform may have to be solved to improve entrepre-neurial incentives and to reduce risks facing farmers For example aspopulation density increases property rights for land pastured in com-mon may need to be redefined to avoid overgrazing Share or cash rentsmay need to be changed as new technologies become available Leaselengths may need to be more securely established to encourage capitalinvestment

Apart from growth or efficiency concerns land redistribution of-ten is needed for equity reasons The number of landless laborers isgrowing rapidly in many countries along with associated poverty and

270


6 See Clive Bell ldquoReforming Property Rights in Land and Tenancyrdquo World Bank Re-search Observer vol 5 (July 1990) pp 143ndash66

malnutrition The principal resource these people control is their laborwhose value is depressed by under-use of labor on large farms Provid-ing land resources to these people can be an effective means of raisingincomes As large farms are broken up even those poor who do notreceive land can benefit due to increased economy-wide demand forlabor Large farms convey political power to a small group This groupmay distort economic policies in a direction that hinders overall eco-nomic growth and creates severe hardship on the poorest segments ofsociety Thus to achieve development as defined in Chapter 1 address-ing the land distribution problem may be necessary

In addition to growth and equity concerns land redistribution canenhance political and economic security or stability In fact expropria-tions of land and partial land reforms experienced in many countries inthe past have probably occurred primarily for purposes of political sta-bilization This stabilization can have positive and negative impacts oneconomic growth and equity To the extent that land redistributiondampens political unrest and reduces the chances of revolution it re-duces the chances of a countryrsquos experiencing the extremes of deathand suffering that can accompany a revolution However to the extentthat a partial land reform achieves political stability without redistrib-uting enough land or economic power to generate widespread growthand fundamentally reduce economic hardship and hunger it may onlyperpetuate a status quo of chronic suffering

Why Redistribution of Access to Land is Difficult to AchieveBecause of the political and economic power that accompanies land-ownership in many countries it is difficult to conduct a meaningfulredistribution of land Historically land reforms have most often beenmade possible only after significant social upheaval caused by revolu-tion the overthrow of colonial powers or war In the former SovietUnion and China social revolutions destroyed the power of the landedelite prior to the institution of collectivizing land reforms An army ofoccupation enforced the socialist reforms in Eastern Europe followingWorld War II The extreme economic political and social turmoil ofthe 1970s in China and of the 1980s and 1990s in the Soviet Union andEastern Europe once again created the conditions for land reforms inthose countries In capitalist countries such as Japan the Republic ofKorea and Taiwan defeats in war or occupation were followed by re-distributive reforms6

271

In countries with capitalist forms of social and economic relation-ships land reforms are difficult to achieve because those holding theland rights also have strong political power Urban consumers oftenalign with landowners Because large farms frequently have large mar-keted surpluses consumers fear that steep food price increases mayfollow a dramatic reform Small changes may be supported as a meansof political stabilization but large-scale restructuring of property rightsis difficult Occasionally governments support redistributive land re-forms in response to strong revolutionary pressures such as Mexico(1940 to 1977) or the Philippines (1972 to 1975) Or land reforms resultfollowing military overthrows of the government such as in Peru (1969to 1975) Land reforms within capitalist agriculture are usually slow tooccur because compensation is required if they are to be accepted bythose losing land Unless the governmentrsquos budget has a large fiscalsurplus which is rare in developing countries or substantial foreignaid gainers cannot compensate the losers sufficiently for the land re-form to be politically viable

Resistance to large-scale administrative land reforms has beenstrong so that such reforms often only follow major upheavals Deci-sion makers in many countries however realize that an inequitabledistribution of land is not conducive to broad-based economic growthAs a result we see more experimentation with land market reformswhich begin with legislative steps to increase security of private landholdings Over time markets are created and land may move from lessto more productive uses through sales or rentals

Many countries have had land reforms in the sense that changesin the land tenure system have occurred The mere fact that a changehas taken place does not necessarily imply that a successful land reformhas transpired Many national leaders are interested in land reform be-cause the reform may lead to increased political stability Howeverunless there is evidence that incentives have been created for farmersto undertake hard work and increase their capital investment and un-less poverty has been reduced and social status improved for the ruralpoor a successful land reform has not occurred

A successful land tenure reform should alter the incentive struc-ture in rural areas It should provide secure property rights that arerecognized by all Whether this structure has been altered is perhapsbest measured by evidence of increased and continuous capital accu-mulation by small farmers in the form of livestock farm buildingsequipment and other improvements in land resources Because theseinvestments may be small in any one year it usually takes a generation


272


BOX 13-4

LAND RESETTLEMENT and REFORM in ZIMBABWEPrior to its invasion in 1890 land in Zimbabwe was held under communaltenure and tribal leaders allocated rights to land Members of Cecil RhodesrsquoPioneer Columns were promised 3000-acre holdings in exchange for as-sistance in colonizing the area During the subsequent colonial period NativeAfricans were relocated to low-rainfall low-productivity land and were barredfrom landownership outside these tribal reserves Large-scale resettlementwithout compensation continued through the early 1950s

In 1965 the minority white government declared independence fromGreat Britain and continued enforcing restrictive conditions against NativeAfricans The subsequent war of independence which raged in the bushwith increased intensity through the 1970s used the ldquoland questionrdquo as auniting principal Overcrowding and dwindling production on communallands led to widespread rural poverty The Lancaster House Agreementswhich paved the way for independence in 1980 formed a basis for post-independence land reform The British government allocated pound44 millionfor purchase on a ldquowilling seller willing buyer basisrdquo Robert Mugabe wonthe first free election and promised to resettle blacks on purchased whitelands Resettlement reduced civil conflict provided opportunities for warvictims and the landless and relieved some population pressures on com-munal lands

Between 1980 and 1990 the government obtained some 3 millionhectares for resettlement and resettled roughly 54000 households Thepace of resettlement slowed through the 1980s as attention moved to-wards providing agricultural services to communal areas Farms in resettle-ment schemes had variable performance many of those under privatemanagement did relatively well while those that were managed undercooperative schemes performed less well Critics of the resettlement pro-gram however noted that the most productive farm areas had beenldquoresettledrdquo by the Presidentrsquos political supporters

The Lancaster House Agreements expired in 1990 effectively endingdonor support of resettlement Through the mid-1990s few farms wereresettled and government attention turned toward restoring macro-economic balance and dealing with adverse consequences of severedrought Following a major currency devaluation in late 1997 unrest grewand independence war veterans began to demand access to land Gov-ernment responded by listing some large-scale commercial farms for ldquocom-pulsoryrdquo resettlement Although owners would be compensated the methodof compensation was unclear and abandonment of the ldquowilling buyer-will-ing sellerrdquo principle caused unease among owners of land and donorsldquoListedrdquo farms were said to be ldquounderproductiverdquo although governmentcritics disputed many of these assertions Between 1997 and 2000 re-settlement became more contentious as rural interest groups increasedpressure on the government through protests and forced seizure of white

273

farms In response to internal political pressure government began a ldquofasttrackrdquo resettlement process between 2000 and 2003 government acquiredmore than 75 of the nearly 4500 white-owned commercial farms By theend of 2003 fewer than 300 white farmers continued to farm

Resettlement in Zimbabwe provides a number of lessons Inequitableland access can create strong political forces particularly following politi-cal change The issue of compensation for lands remains complicatedWhile some white farmers obtained their lands through ancestral succes-sion (their forebears had received land at no cost) many had purchasedtheir land from others and were due fair compensation for their invest-ments As internal political pressure and the economic crisis grew theMugabe government felt increasing urgency for resettlement while re-sources to finance land purchase became scarcer

Land reforms of the type practiced in Zimbabwe can have huge unset-tling effects As commercial farmers were forced out agricultural produc-tion and export earnings dropped by more than 50 further exacerbatingeconomic problems and contributing to near famine conditions Neighbor-ing countries absorbed many of the displaced white farmers spreadingsocial problems around the region The politicization of the process dam-aged the credibility of government and undermined popular support (athome and among donors) for the program

Source William Masters Government and Agriculture in Zimbabwe (WestportConn Praeger 1994) updated by press reports

BOX 13-4 continued

perhaps 25 to 30 years to truly evaluate the success of a change in landtenure or redistribution

Agricultural productivity also should increase in the long runHowever in the first five years following a land reform productivitymay stagnate for a couple of reasons First the mix of commoditiesproduced may shift toward food crops and away from a heavy relianceon cash crops This shift and other disruptions to the normal input andoutput marketing channels credit flows changes in technologies neededfrom the agricultural research system and so forth can hinder produc-tivity growth in the short run

Marketable surpluses may decrease because the poorer segmentsof the rural population who benefit from the land reform have a highincome elasticity of demand for food As their incomes increase throughmore access to land they consume more and the aggregate marketedsurplus may decline Thus short-term increases in agricultural produc-tivity or marketable surpluses are not good measures of the success ofland reform


274


A land reform also can affect capital formation in the public sec-tor Countries with land tenure systems in need of reform often havepoor rural schools and other public infrastructure Large-scale land-owners typically hesitate to tax themselves to support schools roadsand so on Countries in need of land reform usually find it easier tocollect public revenues by taxing export crops or by placing tariffs onimports Governments implementing land reform have an opportunityto restructure the tax system The new owners of small plots have in-creased ability to pay taxes and may do so willingly if they see that thetax system is honest and the proceeds will be used for schools roadsand other local infrastructure

Peasant associations and other farm groups also are likely to beformed after a successful land reform These associations can play animportant role in promoting the development and adoption of new tech-nologies for agriculture improving marketing channels and so forthThe formation of these associations therefore is another test of a suc-cessful land reform

Alternatives to Land ReformThe cost and political difficulty of attaining an effective land reformhave led to alternatives to large-scale administrative redistribution oflands There is now an increasing body of evidence showing that mar-ket-based reforms are effective at increasing investments increasedproductivity and more equitable outcomes7 Examples of market-basedland redistribution efforts include fortification of sales and rental mar-kets encouraging cooperatives to redistribute lands to their memberssales or transfer of government lands and creation of land banks8 Theseefforts generally require three complementary steps (i) legal definitionand assignment of property rights (ii) creating the legal framework forefficient functioning of the markets themselves and (iii) insuring thatcomplementary markets particularly finance and insurance functionefficiently These steps can be costly and difficult and a market-basedreform that does not address all will likely fail in its objectives mdash toredistribute land toward more efficient users

7 See Klaus Deininger and Songquing Jin ldquoTenure Security and Land-Related Invest-ment Evidence from Ethiopiardquo European Economic Review vol 50 (July 2006) pp1245ndash77 and Klaus Deininger and Songquing Jin ldquoLand Sales and Rental Marketsin Transition Evidence from Rural VietnamrdquoOxford Bulletin of Economics and Sta-tistics vol 70 (February 2008) pp 67ndash101 for examples

8 These changes have been called ldquoPhase IIIrdquo of the process of land reform by Alain deJanvry Marcel Fafchamps and Elisabeth Sadoulet in ldquoPeasant Household Behaviorwith Missing Markets Some Paradoxes Explainedrdquo Economic Journal vol 101 no409 (1991) 1400ndash17

275

Definition and assignment of property rights involves surveyinglands titling them and creating a land registry so that perspective par-ticipants can examine the landrsquos history of transactions including liensand competing claims Legal reforms include determining who canparticipate in transactions means of contract enforcement removal onimplicit or explicit restrictions on rental and transfer etc Implicit re-strictions to rental for example may occur because without an adequatelegal framework squatters may possess strong claims to ownershipLand owners may be reluctant to rent to others because they fear losingclaims to ownership Weak and corrupt legal systems make it difficultto enforce property ownership rights and may slow the developmentof land markets Issues such as womenrsquos rights to own and transferlands can have efficiency and equity effects of subsequent market pro-cesses

Finally while land markets have the potential to efficiently redis-tribute lands in the presence of distortions in credit and insurancemarkets creation of land markets alone may not solve the problem ofinequitable distribution For example if banks or other creditors areunwilling to lend money in relatively small amounts due to transac-tions costs associated with such loans then the poor may not be able tofinance purchase or rental of the small amounts of land they seek Un-equal distribution of productive assets such as capital can exacerbatesuch problems because the poorest may not have collateral to support aloan Insurance markets are important because the poorest of the poormay be less willing to risk their assets as collateral

AGRICULTURAL LABOR MARKETSLabor is often the most valuable resource the rural poor possess Thislabor can be used to cultivate their own lands to process and marketproducts after harvest to produce non-agricultural goods some for ownconsumption and others to be sold in markets for child-care cookingand other household activities Alternatively this labor may be sold orrented to others both farm and non-farm employers Agricultural la-bor markets exist because land markets alone can not balance out dif-ferences in land and labor endowments Small-scale land owners orlandless individuals supply labor to large-scale landowners who needmore than their own family labor to carry out their farming operationsLabor markets help allocate resources into their most valuable uses bytransmitting signals about resource scarcity across space and time Aslabor is an important input to production and a key asset held by thepoor the conduct and performance of labor markets are especially im-portant for broad-based agricultural growth


276


Casual versus Permanent LaborLabor may be hired on a casual or temporary basis by the day or forsome other short period of time such as for the harvest or weeding pe-riod Alternatively labor may be hired on a more permanent or longer-term basis perhaps for months or years Casual labor is usually paid incash and in kind (for example food many day labor wages include ameal for the worker) Laborers may be paid daily or on a piece-ratebasis for certain tasks Women are often paid less than men even forthe same task Casual labor is characterized by strong seasonality work-

BOX 13-5

REFORM of CAPITALIST AGRICULTURE in COLOMBIAColombia presents an example of some of the pitfalls associated with landreforms in many countries In the 1930s there was a public outcry mostlyby urban consumers who desired cheaper foods over the lack of produc-tivity on the large landholdings of the rural elite In 1936 Law 200 waspassed that said that potentially productive but poorly cultivated or aban-doned large holdings were to be expropriated by the government Thisthreat caused land productivity to rise for a short time and virtually no landwas confiscated During the 1950s there was a long period of civil conflictknown as ldquoLa Violenciardquo that hastened the destruction of traditional socialrelations and weakened the political powers of the old agrarian oligarchy

Following a peace pact a new phase of land reform began Law 135of 1961 set forth an ambitious reform package that included full compen-sation to existing landholders The gradualist approach doomed the pack-age from the start Political pressure from landed groups allied with urbanconsumer interests successfully diverted inputs often with substantial sub-sidies to large-scale farms Land values on favored farms increased dra-matically making compensation financially impossible By 1972 only 15percent of all land in large farms had been redistributed

Law 4 in 1973 declared an end to this redistributive reform and re-turned the country to the principles of Law 200 At the same time a politicalcoalition between large-scale farmers a small but substantial family-farmsector and urban consumers formed and created pressure for a rural de-velopment program that favored the first two groups Landless and mar-ginal farmers were politically and economically excluded

The conditions for a successful land reform never really existed inColombia Shifting alliances between urban and rural power groups dimin-ished the political will A lack of clear conviction for redistribution com-bined with the slow pace of reform further inhibited the efforts Policiesfavoring large farms largely intended to diffuse political opposition hadthe effect of destroying any prospects for real reform

277


ers tend to be hired during planting and harvest when agriculturallabor demands are highest Longer-term labor may have supervisoryresponsibilities or perform tasks that require special care such as ap-plying farm chemicals Formal or informal contracts may be developedto handle seasonal fluctuations and risks associated with agriculturalproduction

Transactions Costs Asset Inequality and Labor MarketsLabor markets in developing countries often contain imperfections dueto power imbalances imperfect information and transactions costsPower imbalances emerge when a single or small number of employersexist in an area In such cases the employers may exercise monopsony(single buyer) power over their employees and use fewer workers atlower wages than would exist in a competitive labor market Large-scale plantations such as those existing in Central America and in co-coa-producing areas in West Africa may exhibit such power Imper-fect information and transactions costs also constitute major sources oflabor market imperfections Labor must be hired with correspondingcosts of search and contracting and supervised Supervision involvescosts of monitoring and enforcement Such costs may distort incentivesfor hiring and use of different types of labor

Given information imperfections employers may be unaware ofthe reliability of workers some of whom shirk their duties As a resultcostly supervision or other contractual mechanisms must be undertakento ensure the worker performs his or her duties as expected Share crop-ping and piece-work contracts are two such mechanisms commonlyfound in less-developed countries One study of the effectiveness ofsuch contractual arrangements conducted in the Philippines found thatpiece-rate and shared cultivation were associated with significantlyhigher worker effort than time-wage contracts9 Contracts that tie to-gether labor land use agreements credit and other inputs together of-ten represent responses to imperfect information transactions costs andrisk sharing

Wages in agriculture whether on a casual or a full-time basis arerelatively low Throughout the developing world people who rely onagricultural employment as their main source of income tend to be poorPoverty rates are high among tobacco-estate workers in Zimbabwe andMalawi day laborers on the Indian sub-continent and among coffee

9 See A Foster and M Rosenzweig ldquoA Test for Moral Hazard in the Labor MarketContractual Arrangements Effort and Health Review of Economics and Statisticsvol 76 (1994) 213ndash27

278


and other plantation workers in Central America Government inter-ventions into labor markets are often justified based on this observedpoverty Minimum-wage legislation for farm workers has been tried ina number of countries including Zimbabwe South Africa and severalCentral American countries Minimum wages for farm workers tend tobe difficult to enforce also because of high transactions and enforce-ment costs and imperfect information endemic in rural areas of lessdeveloped countries Other interventions include establishment of la-bor enforcement standards provision of labor market information in-vestments in education and schooling to increase worker productivityand promotion of non-agricultural job opportunities that compete withagricultural employment As noted in Chapter 7 non-farm employmentconstitutes a large and growing share of the rural labor markets Asagriculture develops over time it must compete with alternative em-ployment opportunities in rural labor markets

SUMMARYLand tenure refers to the rights and patterns of control over the landresource Land rights determine social and political status as well asthe economic power of a large proportion of the population in develop-ing countries A land reform is an attempt to change the land tenuresystem through public policies Land tenure systems vary in farm sizeand organization affect incentives to produce and invest and influ-ence the distribution of benefits from agricultural growth Family farmscorporate farms state farms and group farms are major types of farmownership Many types of tenancy or leasing arrangements also exist

The post-feudal order has resulted in some large capitalist farmsand a coexisting small farm sector in many countries No form of landtenure is universally efficient Land tenure reform is difficult to achievebecause those holding the land rights have political power Land ten-ure reform including more secure rights over land is needed for im-proved economic efficiency equity and political and economic stabil-ity Unless there is evidence that incentives have been created for farm-ers to undertake hard work and increase their capital investment andunless poverty has been reduced and social status improved for therural poor a successful land tenure reform has not occurred Changesin land tenure and more secure property rights should be accompaniedby credit marketing and other services and new land owners shouldbe taxed to support development Market-based land redistributionefforts include fortification of sales and rental markets encouragingcooperatives to redistribute lands to their members reduced govern-ment ownership and creation of land banks

279

Labor is often the most valuable resource the rural poor possessLabor markets in developing countries often contain imperfections dueto power imbalances imperfect information and transactions costsGovernment interventions into labor markets are often justified basedon this observed poverty

IMPORTANT TERMS and CONCEPTSCapitalistic agriculture Permanent laborCasual labor Political stabilizationCompensation Property rightsCorporate farms Public capital formationEntrepreneurial incentives Semi-feudal land tenureFamily farms Socialist agricultureGroup farms Stale farmsLand reform Successful land reformLand tenure Tenancy reformMarketable surplus Transactions costs

Looking AheadIn this chapter we considered institutional changes related to land andlabor In the next chapter we consider institutional changes related toinputs and credit policies Governments often intervene in input andcredit markets We will examine the nature and advisability of theseinterventions

QUESTIONS for DISCUSSION1 What is land tenure2 What are the major ways farms are organized3 What are the major types of tenancy arrangements4 What is land reform5 How does an anti-feudal land reform differ from land reforms

within a capitalist or socialist agrarian structure6 Why is a land reform often necessary7 Why is a land reform difficult to achieve8 Why are large land holdings in a densely populated country bad9 What are the requisites of a successful land reform10 What pressures might population growth or new technologies

place on existing land tenure arrangements11 What alternatives exist to administrative land reforms12 How can more secure land rights improve agricultural

productivity


280


13 What distinguishes casual labor from permanent labor and why doboth exist

14 Why are transactions costs a problem in labor markets

RECOMMENDED READINGSBell Clive ldquoReforming Property Rights in Land and Tenancyrdquo World Bank

Research Observer vol 5(2) (July 1990) pp 143ndash66Berry Albert and William Cline Agrarian Structure and Productivity in

Developing Countries (Baltimore Johns Hopkins University Press 1979)de Janvry Alain ldquoThe Role of Land Reforms in Economic Development

Policies and Politicsrdquo American Journal of Agricultural Economics vol 63(1981) pp 384ndash92

Deininger Klaus and Hans Binswanger ldquoThe Evolution of the WorldBankrsquos Land Policy Principles Experience and Future ChallengesrdquoWorld Bank Research Observer vol 14 no 2 (August 1999) pp 247ndash76

Deininger Klaus and Songquing Jin ldquoTenure Security and Land-RelatedInvestment Evidence from Ethiopiardquo European Economic Review vol 50(July 2006) pp 1245ndash77

Feder Gershon and Klaus Deininger ldquoLand Institutions and Land Mar-ketsrdquo World Bank Policy Research Working Paper Series 2014 1999

Ray Debraj Development Economics (Princeton Princeton University Press1998) chapters 12ndash13

Wortman Sterling and Ralph W Cummings Jr To Feed This World TheChallenge and the Strategy (Baltimore Johns Hopkins University Press1978) pp 271ndash88

281

CHAPTER 14

Input and Credit Markets

To take maximum advantage of technological advances in farmingsystems farmers must have access to recommended productioninputs at the specific times and in the quantities and qualities needed(and) access if necessary to outside sources of finance to pur-chase these inputshellip

mdash Sterling Wortman and Ralph W Cummings1

THIS CHAPTER1 Explains why it is important for farmers to have access to purchased

inputs and to credit2 Describes the nature of rural money markets and the determinants

of rural interest rates3 Discusses why governments tend to subsidize input prices and credit

and why these subsidies are generally inadvisable

IMPORTANCE of NEW INPUTSSuccessful agricultural development in most developing countries to-day requires increased output per hectare and per worker This agri-cultural intensification depends in part on the availability and financ-ing of new often manufactured inputs Fertilizers and pesticides newseeds irrigation systems mechanical power and supplemental miner-als and nutrients for animals are examples of these inputs Uptake ofthese inputs links farmers with national and international markets andexposes them to the associated risks and rewards As energy prices in-crease and demands for food grow over time the cost of productionand relative returns of different input mixes will be affected by interna-tionally determined forces Governments must address a series ofissues related to production distribution pricing financing and

1 Sterling Wortman and Ralph W Cummings Jr To Feed This World The Challenge andthe Strategy (Baltimore Johns Hopkins University Press 1978) p 343

282


regulation of inputs and to the identification and encouragement ofoptimal on-farm input usage

Role of Manufactured InputsManufactured inputs have an important role to play in agriculturaldevelopment because the potential for expanding the land resource islimited in most countries This scarcity or inelastic supply of land meansthat its price tends to increase over time both absolutely and relative tothe price of labor The induced-innovation theory described in Chapter11 indicates that farmers will seek new agricultural technologies thatwill enable them to substitute lower cost inputs for those whose scar-city and price are rising Agricultural research described in detail inChapter 12 will create the plant varieties that are responsive to theseinputs New higher-productivity inputs include new seeds fertilizerirrigation and pesticides many of which will be produced domesti-cally but their prices will be affected by international events Seedsfertilizer irrigation and pesticides tend to be highly complementaryinputs To be more productive than traditional varieties new varietiesof wheat rice corn and other food crops require more fertilizer andbetter water control than would be used under traditional practicesWater and fertilizer tend to induce lush plant growth and an environ-ment favorable to weeds and other pests thus raising the profitabilityof pesticides as well If this package of inputs is available to farmerstogether with the necessary financing and information on usage landand labor productivity can be raised The result is an increase in outputper hectare and per unit of labor applied at least in those areas wherethe new inputs are suited and adopted A description of these inputswill help better define their potential and limitations

Seed Seeds of high-yielding varieties are usually a relatively low-cost input However seed of superior varieties must be developed oridentified tested produced and multiplied monitored for quality anddistributed to farmers The government often has a role to play in thedevelopment testing quality monitoring and production of basic seedPrivate firms can be involved in the multiplication of seeds and distri-bution to farmers The exact roles of public and private bodies in a par-ticular country may change as the seed industry develops As hybridseeds continue to spread for crops such as maize rice and eggplant theimportance of the seed industry grows as farmers planting hybrids cannot save and use their seed from the previous crop if they expect tomaintain productivity One of the concerns with genetically modifiedcrops is that one or a few seed companies may own the intellectual

283

property rights associated with the new seeds and therefore may chargea significant seed premium (see Chapter 12 for further discussion) Thegovernment has a role to play in ensuring no undue exercise of mo-nopoly power by seed companies

Fertilizer Higher-producing varieties require additional fertilizerparticularly nitrogen phosphate and potash These nutrients can beobtained from natural fertility in the soil animal and plant wastes andleguminous plants that can fix nitrogen from the air These naturalsources often but not always must be supplemented by chemical fer-tilizers to provide the necessary quantities and precise mixtures re-quired In areas where the supply of natural fertilizers is relatively in-elastic as commercial fertilizers become less expensive and are avail-able in relatively elastic supply their use can be expected to increase

World fertilizer prices can be volatile and between 2002 and 2008they trended upward placing cost stresses on developing-country pro-ducers Upward pressures on prices are caused by world-wide demandgrowth increased costs of raw materials mdash especially natural gas whichis used to produce nitrogen the main ingredient in all nitrogen fertiliz-ers and rising transportation costs due higher energy costs Demandfor fertilizers has grown throughout the world partly due to incomeand population growth and partly the result of more corn being plantedin developed countries for use in ethanol bio-fuels Fertilizer prices mayremain high in the future as all of these factors continue to influence themarket

Water Availability of irrigation water is a major determinant ofthe number of crops grown per land area per year the inputs used andhence production Higher levels of fertilizer application require moreand better-timed water input Drainage is also important because fewcrops can tolerate excessive standing water or salinization Several im-portant factors complicate irrigation decisions Irrigation infrastructurerequires large financial investments and governments often providefunds or encourage private entities to provide funds for such endeav-ors Efficient water management requires proper pricing mechanismsprivate users of water might over- or under-use irrigation water if it isnot properly priced Proper pricing is however complicated by diffi-culty in measuring the amount of water used Water system manage-ment can have important direct effects on human health malaria andschistosomiasis are common tropical diseases whose vectors thrive instanding water Because of these considerations development andmanagement of irrigation and drainage systems often require a combi-nation of public and private initiatives Governments can seek to


284


expand and modernize irrigation and drainage facilities They can de-sign rules of water pricing to encourage economically sound water useFarmers and villages themselves can develop smaller often well-basedsystems and the necessary canals for distribution on farms along withrules for water distribution

Efficient water use is likely to grow in importance in many areasof the world as looming water shortages result from over-use of aqui-fers damming of major river systems and from climate change whichaffects rainfall patterns and temperature-based rates of evaporationSeveral water danger zones are emerging in the developing world in-cluding the Sahel region of Africa the Horn of Africa the entire MiddleEast the Indo-Gangetic Plains in India and Pakistan and the NorthChina Plain2 In these areas growth in demand or dwindling suppliesor both is likely in the future to be associated with shortages and un-less solutions are found dwindling agricultural production Solutionsinclude better management of existing supplies and new efficiency-enhancing technologies such as drip irrigation and drought-resistantplant varieties

Pesticides Farmers often find using pesticides (insecticides forinsects fungicides for diseases and herbicides for weeds) highly prof-itable as agricultural production intensifies through increased use ofnew seeds fertilizer and water Sometimes these pesticides are appliedas a preventative treatment and other times after a major pest problemdevelops

Pesticides can have serious drawbacks however Some pesticidesare toxic to humans and animals and result in poisonings in the shortrun or chronic health problems in the longer term Applications withimproper equipment or inadequate protective clothing exacerbate healthproblems Improper storage and handling can create adverse healthconsequences Chemical pollution can spread beyond the area wherethe pesticide is applied with particularly deleterious effects on fisher-ies Some pesticides kill insects that are beneficial to agriculture Oftenwhen pesticides are applied over a period of time the target insectsdiseases or weeds develop resistance making increased pesticideamounts necessary to maintain the same level of effectiveness

Pesticides despite these problems will likely be needed for sometime until new pest-resistant varieties biological and cultural practicesand other substitute methods for pest control can be further developed

2 See Jeffrey D Sachs Common Wealth Economics for a Crowded Planet (New York Pen-guin Books 2008) pp 121ndash37

285

Several of these methods called integrated pest management or IPMhave already been developed and implemented for certain pests on cer-tain crops in certain locations (see Box 14-1) Much additional researchis needed however to make these practices more widely available indeveloping countries Weed control is especially important to intensi-fied production in Africa where labor for weeding is less abundant thanin other regions

Animal Inputs As discussed in Chapter 7 livestock play an im-portant role in farming systems in developing countries Animal pro-ductivity is often low and new inputs related to disease control supple-mentary minerals and other feed supplements improved shelter andin some cases better breeds can make a difference Inputs for control-ling diseases and parasites are perhaps the most important the sig-nificance of feed supplements shelter and new breeds varies from

BOX 14-1

INTEGRATED PEST MANAGEMENT in ECUADORrsquoS HIGHLANDSPotato producers in the Ecuadorian highlands face a number of importantpests including Late Blight Andean Weevil and the Central American Tu-ber Moth Late Blight is controlled through heavy applications of fungicideswhile the latter two pests are controlled by spraying Carbofuran a highlytoxic pesticide Farmers combine pesticides into a mixed ldquococktailrdquo con-taining as many as 12 chemical agents and spray their fields with up toeight applications in a single season These cocktails are mixed withoutknowledge of interactions between active ingredients or of potential hu-man health impacts Farmers complained about the high financial costof these applications and the health costs associated with chemicalmisuse IPM techniques were developed through a USAID-sponsoredresearch project (IPM-CRSP) and included identifying and screening LateBlight-resistant varieties use of insect traps more targeted spraying of alow-toxicity alternative field sanitation and cultural techniques and the useof biological control alternatives Local farmers were invited to participatein Farmer Field Schools and field days to learn about the techniques Pes-ticide applications were reduced by half and experience on farmer fieldsshowed that the IPM package yielded more than $600 per hectare in netbenefit compared to alternative practices This example shows that IPMtechnologies can be profitable at the same time they reduce exposure toharmful chemicals

Source Alwang et al ldquoDeveloping IPM Packages in Latin Americardquo in Globaliz-

ing Integrated Pest Management A Participatory Process ed GW NortonEA Heinrichs GC Luther and ME Irwin (Ames Iowa Blackwell Publishing2005)


286


3 See Hans Binswanger ldquoAgricultural Mechanization A Comparative Historical Per-spectiverdquo World Book Research Observer vol 1 (January 1986) pp 27ndash56

country to country and by type of livestock Because indigenous live-stock have been adapted to their specific environments the transfer inof new breeds is particularly complex except perhaps for poultry

Mechanical Inputs Agricultural mechanization is frequently acontroversial subject Tilling planting cultivating and harvesting arestill done by hand in large parts of the developing world particularlyin Sub-Saharan Africa and in hilly regions on other continents In manyareas of Asia and Latin America animals are an important source ofpower Even in countries where farming is more mechanized powertillers and tractors are often restricted to tillage and a few other opera-tions3 The controversy arises because machinery usually substitutesfor labor or animals In many developing countries labor is abundantand its cost is low Alternative employment opportunities outside agri-culture are limited so that labor displacement is undesirable there-fore mechanization is most profitable in countries where land is abun-dant labor is scarce and capital is cheap this situation would seem toexist in relatively few countries

Does this mean that there is little role for agricultural mechaniza-tion Not necessarily but the types of mechanization should be differ-ent from what is observed in most western developed countries Highlyproductive cropping systems whether on small or large farms can ben-efit from more precise planting depths and fertilizer placement me-chanically pumped irrigation water mechanical threshing (but usuallynot harvesting unless labor is scarce) transport power spraying of pes-ticides and tilling when timing is critical for multiple cropping Manyof these mechanical devices however may be hand-held (eg spray-ers) or stationary (eg pumps and threshers) Even in areas where la-bor is usually abundant shortages can occur in certain seasons whichif relieved through mechanization could increase the overall demandfor labor

Individual farmers will consider the private profitability whendeciding whether to invest in a machine If very large farms exist incountries with surplus labor in agriculture operators of these farmsmay prefer labor-saving machinery because it allows them to deal withfewer employees and given the transactions costs and capital subsi-dies that may exist it may be more privately profitable to follow large-scale mechanization even if society as a whole would be better offwithout it Such behavior is one of the reasons that land reform is soimportant to many developing countries (see Chapter 13)

287

Governments and foreign assistance agencies must be careful notto encourage non-optimal mechanization (from societyrsquos viewpoint)through ill-advised subsidies or other means Mechanization is inevi-table over time but the type of mechanization should be appropriategiven the relative endowments of land labor and capital Certain gov-ernment policies such as those influencing exchange rates indirectlyaffect the prices of capital-intensive inputs such as machinery Impactson relative prices of inputs should be considered during policy formu-lation

Input MarketsDeveloping countries often subsidize the purchase of seeds fertilizersirrigation water pesticides and occasionally mechanical inputs Is thisa good idea Generally speaking it is not Such subsidies can lead tolosses in economic efficiency for the country as a whole can be costly tothe government can discourage private-sector competition in the pro-vision of these inputs and particularly in the case of pesticides maylead to environmental damages from over-application

Governments frequently become involved in multiplying and sell-ing improved seeds to farmers at or below cost In some cases scarceresearch resources are diverted to multiplying seeds rather than devel-oping new varieties In other cases research systems are forced to focuson selling seeds to pay for operating costs for the system As a resultprivate firms unable to compete with the government treasury do nottake on the function of multiplying and selling seeds Without devel-opment of these private firms the government must continue to be re-sponsible for this function

Fertilizer subsidies can be used in selected situations in which gov-ernments desire to increase the adoption of new inputs by groups offarmers that might not otherwise adopt them Unfortunately in manycountries these subsidies are necessitated by the artificially low pricesimposed on agricultural outputs for the purpose of keeping food pricesdown for urban consumers Input subsidies help compensate farmersfor income losses from these policies While this combination of poli-cies can have the desired effect at least in the short run high costs tothe government and potential fiscal problems result in the long runmaking the policies non-sustainable Also the economic efficiency lossesassociated with these policies can be substantial Finally studies showthat from the farmerrsquos perspective access to inputs can be more impor-tant than their prices Subsidy policies and government involvement ininput markets often lead to shortages of inputs and their rationing whichare harmful to long-run growth


288


BOX 142

MODERN INPUTS and ECONOMIC GROWTHNew technologies and inputs help achieve increases in agricultural outputand income in rural areas of developing countries This income is spent bythe households on goods and services some of which are produced lo-cally and others which are imported into the region These expendituresinduce income growth in the non-farm economy the so-called multiplier

effects By far the largest portion of these multipliers is caused by house-hold expenditures on consumer goods and services though the effectsresulting from increased use of farm inputs and in processing marketingand transportation of farm output are substantial contributors to regionalgrowth

Linkages between farms and suppliers of inputs also create spilloversinto the local economy Though seeds agrichemicals irrigation suppliesand farm machinery usually are not produced in agricultural regions inputsupply services including technical advice machinery repair and a largeproportion of irrigation construction and maintenance can be produced lo-cally These activities create opportunities for non-farm employment andincome that is in turn spent locally The creation and deepening of back-ward linkages from agriculture are important contributions to rural eco-nomic development

Efficiency losses are also a problem for water and pesticide subsi-dies The latter can create excessive use of toxic chemicals and can re-sult in all the deleterious effects described earlier In summary inputsubsidies are generally inadvisable The government can play a moreconstructive role by ensuring the availability of these inputs (includingthe improvement of rural roads) publishing price information to en-courage competition setting quality standards for seeds and fertilizersrequiring and enforcing labeling of input containers and regulatinguse of toxic pesticides and transgenic seeds

Role of CreditAccess to credit becomes important as a developing country moves fromtraditional to more modern agriculture Credit helps farmers purchaseinputs such as seeds fertilizers and chemicals It facilitates purchase ofdurable productive inputs such as machinery and helps householdsbetter manage their resources Credit can be used for input purchasesinvestment marketing and consumption Without credit even high-return investments long- or short-term would be infeasible for manyfarmers Loans enable farmers to better manage risks since they canborrow during bad years and pay back the loans during good years

289

Even within cropping seasons short-term credit is used to smooth con-sumption and provide cash at times of acute needs

Without widespread access to credit inputs associated with im-proved technologies can be purchased only by wealthier farmers Capitalformation and improvements on smaller farms can be hampered Fewerfarmers are able to purchase or even rent land In cases where producemarketing requires cash outlays lack of credit can disrupt marketingactivities Well-functioning rural financial institutions are essential toimproving economic efficiency reducing income risk and meeting in-come distribution goals

NATURE of RURAL MONEY-MARKETS and DETERMINANTS

of RURAL INTEREST RATESFinance in rural areas consists of three components credit (borrowingand lending) saving and insurance These components frequently over-lap as savings can be used for capital purchases (and hence substitutefor credit) or as a safety net or insurance substitute Developing-coun-try households use complex strategies to increase their productive ca-pacity share risk and manage purchases of food and other goods overtime Access to finance helps determine the suitability of such strate-gies Better understanding of rural financial markets requires consider-ation of the three components and efforts to strengthen one compo-nent may be compromised by weaknesses in others4

Credit facilitates the temporary transfer of purchasing power fromone individual or organization to another However many types of lend-ers or money-markets exist and credit institutions may or may not ad-equately serve the needs of a developing agriculture Credit is oftenviewed as an oppressive or exploitive device in developing countriesWe need to examine both the types of lending sources found in devel-oping countries and the evidence of exploitive behavior associated withthese money-markets

Types of Money-MarketsRural money-markets consist of two broadly defined lending sourcesorganized (or formal) and informal Private commercial banks govern-ment-controlled banks cooperative banks and credit societies are calledorganized credit sources Public or private these lending sourcesusually are regulated by the government and are open to audit and

4 See Manfred Zeller and Richard L Meyer The Critical Triangle of Microfinance fromVision to Reality (Baltimore Johns Hopkins University Press 2003) for more details


290


inspection In addition to credit they may provide other financial ser-vices such as savings and certain forms of insurance In general formalmoney markets have historically not served well the needs of small-and medium-scale farmers in developing countries As a result overtime many developing-country governments have intervened to pro-mote better access to formal financial services primarily credit Theseprograms were largely unsuccessful for many reasons one of whichwas that they did not recognize alternative informal credit sources thatare found throughout the developing world

Informal or unorganized credit sources include moneylendersmerchants pawnbrokers landlords friends and relatives Some creditsources mdash eg landlords and merchants mdash combine other economicactivities with lending Except for absentee landlords the relationshipbetween borrower and informal lender is generally marked by personalcontact simple accounting and low administrative costs

Informal lenders are important sources of funds in many rural ar-eas These lenders usually know the borrowers personally require littlecollateral make consumption as well as production loans are acces-sible at all times and usually are flexible in rescheduling loans How-ever these informal lenders also tend to charge high rates of interestand are frequently accused of exploitive activities In cases where lend-ers are landlords merchants or both they have been accused of usingtheir position to tie borrowers to themselves by forcing their clients torent from borrow from buy from and sell to them Thus these agentsare said to extract monopoly profits from their clients Are borrowersconsistently being exploited It is important to examine this questionbecause it has important implications for the role of more formal pri-vate and public credit institutions

Do Informal Money-Markets Exploit BorrowersThe issue of borrower exploitation revolves around the existence ofusury or monopoly profits earned by the lenders Hence we need toconsider the factors that determine the interest rates charged by theselenders The major components of rates of interest on loans are (1) ad-ministrative costs (2) the opportunity cost of lending (3) a risk pre-mium due to the probability of default in repayment and (4) monopolyprofit

Administrative costs should not be too high for moneylendersgiven simple contracting procedures and personal knowledge of cli-ents Many loans with small amounts of money per loan increase ad-ministrative costs but these costs are probably not excessive Opportu-nity costs of lending are low in rural areas because interest rates offered

291

by organized money markets tend to be low Therefore the critical fac-tor in determining whether interest rates are generating monopoly prof-its in the informal money market is the risk premium or the probabilityof default The risk premium for loans to small-scale particularly ten-ant farmers can be high These farmers are close to the margin of sub-sistence and a streak of bad weather or a serious illness can spell disas-ter Without formal collateral the risk of default grows Because weathertends to affect all farmers in a given area a spell of bad weather createspotential for simultaneous default of many borrowers Therefore onewould expect relatively high interest rates just to cover the risk factorExploitive situations do exist in which moneylenders extract monopo-list gains However careful empirical studies seem to indicate thatmonopoly profits may not be as prevalent or large in informal creditmarkets as is often believed5 The reason is competition The amountsof the loans are often small and start-up costs required to become amoneylender are low This ease of entry serves to keep interest rates atan appropriate level given the level of risk administrative costs andthe opportunity cost of capital If profit margins become large incen-tives are created for new moneylenders to enter the business and com-pete away those profits

High risks associated with loans to subsistence farmers howevermean that lenders have incentives to maintain tight control over bor-rowers Moneylenders who are also landlords or merchants have meansof tying their clients to themselves through leases consumer credit andso forth Other moneylenders may be hesitant to lend to someone whoalready owes substantial sums or who has defaulted to another In sum-mary it appears that some exploitation by moneylenders does occurparticularly if the moneylenders control the land or the market How-ever the magnitude of this exploitation may not be as great as is oftenbelieved Evidence of high interest rates on rural loans is alone not suf-ficient to conclude that moneylenders are exploitive since there arehigh costs associated with making these loans Informal sources of creditserve a vital function in most developing countries because withoutthem most small farmers would not have access to credit

Organized Money-Markets and Transactions CostsWhy are small farmers in developing countries not better served byorganized money-markets Both private and public financial institutions

5 See for example P Bardham and A Rudra ldquoInterlinkage of Hand Labor and Capi-tal Relations An Analysis of Village Survey Data in East Asiardquo Economic and Politi-cal Weekly (1978) pp 367ndash84


292


find that transactions costs are high Loans savings and insurance needsare small and the paperwork and time spent evaluating potential cli-ents collecting payments and supervising loans in order to reduce risksof default are costly In many cases the government regulates the maxi-mum interest allowed and that rate will fail to cover the administra-tive costs and risk Thus where private and public sources of financeexist they tend to deal with larger-scale farmers to reduce administra-tive costs and the chances of default (see Box 14-3)

The magnitude of these transactions costs is illustrated by a rela-tively successful bank that has provided credit for many years to therural poor in Bangladesh The Grameen Bank of Bangladesh targetshouseholds that own less than 05 acres of cultivable land6 The bankorganizes its clients into groups and associations provides credit with-out collateral and supervises utilization of the loans A maximumamount (the equivalent of about $150) is lent to individuals within agroup of five members Nearly three-fourths of the borrowers arewomen Peer pressure together with close supervision ensures repay-ment rates of more than 90 percent The interest rate charged is roughly16 percent a year and the default rate has historically been less than 2percent The bank is subsidized however by the State Bank ofBangladesh and by the International Fund for Agricultural Develop-ment (IFAD) The interest on the loans would be around 5 to 10 percenthigher than it is if the bank had to break even to borrow at the samerate as the other financial institutions in the country7 Because the de-fault rate and the opportunity cost of capital are low it is clear thatmost of the interest charged is to cover administrative cost The bankcould lower this cost with less supervision but the default rate wouldlikely rise and offset the cost saving

The Grameen Bank also lends very little money for activities asso-ciated with crop production In general this type of microcredit lendingserves mostly for livestock and poultry for small-scale processing andmanufacturing and for trading and shop keeping These activities areless risky than crop production The Grameen Bank model has beenimproved upon through sequential experimentation and micro-finance

6 See Mahabub Hossain ldquoCredit for Alleviation of Rural Poverty The Grameen Bankof Bangladeshrdquo International Food Policy Research Institute Research Report No65 (Washington DC February 1988) for an excellent discussion of the GrameenBank see also Mark M Pitt and Shahidur Khandker ldquoThe Impact of Group-basedCredit Programs on Poor Households in Bangladesh Does the Gender of Partici-pants Matterrdquo Journal of Political Economy (1998) pp 958ndash96 for information onthe impacts of such programs

7 Hossain ldquoCredit for the Alleviation of Rural Povertyrdquo p 11

293

organizations around the world are now flourishing without subsidi-zation These organizations and some of their organizing principles arediscussed below

One can see that small agricultural loans are costly and as a re-sult most commercial lenders lend to larger farmers where the risk andadministrative costs are lower Government-supported credit programsoften have subsidized interest rates in developing countries but theserates tend to encourage loans to large farmers (many micro-finance in-stitutions are an exception)

Transactions costs for private or public loan transactions can alsobe high because of fraud favoritism or embezzlement of funds fromwithin the system This situation arises most frequently when loansare subsidized creating excess demand for credit and incentives forbribery

GOVERNMENT-ASSISTED CREDIT PROGRAMSMany governments use credit programs as part of their developmentprogram and many international donors support these programs Gov-ernment-supported credit is based on the notions that (1) credit is criti-cal to the adoption of new technologies (2) moneylenders exploit farm-ers and public credit can provide them with competition (3) credit canbe combined with supervision and education to increase the capacityof farmers to use modern inputs (4) subsidized credit can offset disin-centives to production created by other policies that discriminate againstagriculture and (5) government-supported credit programs can lesseninequities in the rural sector8

Subsidized credit provides an easy vehicle for transferring publicfunds to the rural sector Examples of subsidized credit programs

BOX 14-3

ADMINISTRATIVE COSTS and LOAN SIZEThe cost of lending to farmers includes relatively large fixed costs to payfor administration and bookkeeping To cover these costs interest ratesmust be higher for smaller loans even if all borrowers have equal risk ofdefault For example if the variable cost of capital is 10 percent but thebank incurs a fixed cost of $10 to administer each loan for the bank tobreak even on each loan it must charge a total of 20 percent interest tothose who want to borrow $100 for repayment after one year In contrastthose who want to borrow $1000 would have to pay only 11 percent


8See Yujiro Hayami and Vernon Ruttan Agricultural Development An International Per-spective (Baltimore Johns Hopkins University Press 1985) pp 398ndash403

294


Bangladesh families have benefited from Grameen Bank loans

abound in every region of the developing world Dale Adams points toa number of studies of such programs in Honduras Sudan Jamaicaand elsewhere that demonstrate how ill-advised subsidized credit isfrom a development perspective9 Adams finds that while evaluationsof subsidized credit programs often find favorable impacts on individualborrowers a broader examination of the net effects of these programsusually finds few positive effects on economic development They alsocan compromise the viability of the rural financial system

Effects of Subsidized CreditSubsidized credit creates excess demand for credit by lowering interestrates In many cases because interest rates are negative after control-ling for inflation the demand for credit is infinite Subsidized crediterodes the capital available in financial markets and undermines ruralfinancial institutions Private banks cannot cover expenses (adminis-trative costs defaults etc) at low interest rates yet they are forced tolower interest rates in order to remain competitive with public creditsources even if not required to lower them by law Thus the survival

9 See Dale W Adams ldquoThe Conundrum of Successful Credit Projects in FlounderingRural Financial Marketsrdquo Economic Development and Cultural Change vol 36 (Janu-ary 1988) pp 355ndash67

295

of these private institutions is threatened If they fail additional gov-ernment involvement and additional budget outlays will be neededAn equally important effect of subsidized loan rates is that they lowerall interest rates and hence discourage private savings If agriculturaldevelopment is to be able to generate capital then viable rural financialinstitutions are needed to both provide loans and mobilize savings

Because subsidized credit generates excess demand for loans creditis rationed and almost inevitably goes to the larger farms for which theadministrative costs are lower The phenomenon of successful impactsof subsidized credit on individual borrowers yet negligible effects onoverall development exists because rationed credit means that fewpeople are touched by the programs Seldom is more than 5 percent ofthe potential credit recipients reached Because the subsidized loansare valuable the credit system can become politicized as large land-owners offer favors to bank managers to obtain loans or financially sup-port politicians to encourage continuation of the program In additionto these distributive effects default rates on subsidized loans tend to behigh Public sector lenders may be less familiar with the borrowers thanare the lenders in the private sector Because there are pressures to lendto larger borrowers the productive potential of the loan may not beconsidered leading to high default tales

Innovations in Rural FinanceSince the early 1970s a gradual revolution in lending to the poor hasbeen occurring in a number of developing countries As countries learnfrom their failures with subsidized credit programs and as experiencegrows with targeted small group-loan programs such as the GrameenBank in Bangladesh the large-scale provision of small loans to low-income people has expanded As of 2001 more than 1500 micro-financeinstitutions (MFIs) with 54 million members existed in 85 developingcountries10 The Grameen Bank however while demonstrating that poorpeople can be good credit risks given a credit program structured withproper incentives has remained somewhat constrained by its inabilityto operate entirely without subsidy Since the late 1980s the povertylending approach of banks such as the Grameen Bank has been chal-lenged by a more commercially-oriented f inancial systemsmicrofinance approach11 While both approaches focus on the poor

10 Cecile Lapenu and Manfred Zeller Distribution Growth and Performance ofMicrofinance Institutions in Africa Asia and Latin America IFPRI FCND Discus-sion Paper 114 (Washington DC2001) p 111

11 See Marguerite S Robinson The Micro Finance Revolution Sustainable Finance for thePoor (Washington DC The World Bank 2001) p 7


296


the latter emphasizes savings services to the poor as well as loans12 Afinancial systems approach enables banks to generate sufficient re-sources to not only be sustainable but to provide opportunity for theeconomically active poor (as opposed to the extremely poor) to saveand invest at a decent return during times when they are able to saveExamples of such micro-credit banking systems that have proven prof-itable are found in countries as diverse as Bolivia and Indonesia Mi-cro-financial institutions are also experimenting in offering the thirdcomponent of the finance trinity micro-insurance Micro-finance insti-tutions have incentives to help their clients manage risks since a pooroutcome may lead to default on loans

These new experiences in providing finance to small-scale and poorfarmers have been built on a number of principles The first principle isrecognition that credit savings and insurance are interlinked and ef-forts to provide one component should consider impacts on the othersSecond funds are fungible and can be used for things other than inputpurchases such as consumption and other emergency needs By betterenabling risk management access to financial services can improve in-come generation over time A third principle is that for sustainabilitycredit providers should charge what the loans cost which is usuallymore than is charged to large commercial borrowers because of the trans-actions costs on many small loans Some of those costs arise from thenecessity of screening credit applicants The key innovation ofmicrofinance is the use of joint group liability loans are made to groupsand if one member of the group defaults the entire loan is consideredto be in default sing group liability groups use local knowledge toscreen members and moral suasion to enforce repayment These fac-tors reduce transactions costs and improve loan repayment rates Com-mercially-oriented micro-finance provides formal competition for in-formal money lenders and hence is most likely to succeed in preciselythose areas where moneylender profits are excessive due to local mo-nopoly power

Lessons for Credit PoliciesSeveral lessons emerge from the applied research on rural credit Firstadoption of new technologies often requires purchase of modern in-puts Consequently credit availability has been found to be more im-portant to development than the interest rate charged and there is a

12 Lapenu and Zeller Distribution Growth and Performance of Microfinance Institu-tions in Africa Asia and Latin America note that of the 54 million members ofMFIs world wide 44 million are savers and 23 million are borrowers

297

tradeoff between credit availability and subsidized interest rates Sec-ond the viability of rural financial institutions is jeopardized by subsi-dized credit This weakening of rural financial markets can constrictboth the supply of and demand for credit The rural poor are penalizedon their deposits as well as their loans13 Third credit is fungible inother words it may not be used for its intended purpose Itrsquos easy forsubsidized production credit to be used for consumption items or non-productive assets This fungibility is not necessarily bad unless it raisesthe default rate but should at least be understood by policymakersFourth a key to reducing market interest rates is to reduce agriculturalrisk (and hence defaults) and the transactions costs associated with lend-ing and borrowing Higher income levels associated with economic de-velopment may help reduce the risk of defaults as may certain cropinsurance and other government policies discussed in Chapter 15 Im-proved roads and other means of communication and in some casesgroup borrowing and guarantee of loans can help reduce transactionscosts

Because administrative costs per dollar lent to small farms arehigher than to large farms banks either must charge higher interestrates (or other hidden charges) to small farms than large or give loansmainly to large farms Thus many countries need to pursue policies tomake land more widely available to the poor or the credit system willalso work against the poorest farmers

SUMMARYSuccessful agricultural development requires increased output per hect-are and per worker This agricultural intensification depends on theavailability of new often manufactured inputs Seed fertilizer pesti-cides irrigation mechanical power and supplementary minerals andfeeds are examples of these inputs Manufactured inputs can substitutefor inelastic supplies of land to increase production at a lower per-unitcost A variety of issues must be resolved by each country howeverwith respect to externalities associated with certain inputs such as pes-ticides the appropriate types of mechanization and the role of the gov-ernment in producing distributing and financing inputs Governmentsoften subsidize inputs These subsidies can discourage private compe-tition for input supply can be costly to the government and may en-courage overuse of inputs such as pesticides that create externalities

13 See Adams ldquoThe Conundrum of Successful Credit Projects in Floundering RuralFinancial Marketsrdquo p 366


298


Credit is essential as a country moves from traditional to modernagriculture Credit from informal sources such as moneylenders isoften viewed as oppressive However risks and administrative costs ofloans to small farms are high and given the typical competition amongmoneylenders monopoly profits may not be as prevalent or as high asoften portrayed When moneylenders are also landlords or merchantsthe chances of exploitation are greater Formal private and public lend-ers do not serve a high proportion of the farmers because risks andtransactions costs are high Because governments frequently subsidizeinterest rates rationed credit tends to go to the larger farms The subsi-dies erode the capital in the financial system and thus the number offarms served Low interest rates also discourage deposits and reducethe ability of formal private banks to compete Credit savings and in-surance are interlinked and efforts to provide one component shouldconsider impacts on the others

IMPORTANT TERMS and CONCEPTSAdministrative costs MicrofinanceExploitation MoneylendersFertilizers and pesticides Money-marketsFungibility Monopoly powerGrameen Bank New seedsGroup lending Opportunity costs of lendingInformal credit sources Organized credit sourcesInput subsidies Purchased inputsIntegrated pest management Risk of defaultIrrigation systems Subsidized creditMechanical power

Looking AheadGovernments often intervene in agricultural markets to influence pricesIn the next chapter we examine why governments intervene and theeffects of those interventions Efficient marketing systems are essentialfor agricultural development and we consider the role that govern-ments can play in improving the marketing system

QUESTIONS for DISCUSSION1 Why are manufactured agricultural inputs usually necessary for

agricultural development2 What are some of the key manufactured inputs needed3 In what manner are agricultural inputs complementary in nature

299

4 What are the advantages and disadvantages of pesticides5 Why is mechanization a controversial issue6 Why do governments subsidize the purchase of manufactured

inputs7 Why is agricultural credit important to agricultural development8 How do organized and informal sources of credit differ9 Why might bankers be biased against small farmer loans in devel-

oping countries10 What factors would you examine if you were trying to assess

whether interest rates charged in informal money-markets wereexploiting borrowers

11 What are subsidized interest rates Are they a good idea forgetting agriculture moving

12 What might be one problem associated with the fact that credit isfungible

13 Why do governments support credit programs14 How might transactions costs associated with rural financial

markets be reduced

RECOMMENDED READINGSAdams Dale W ldquoThe Conundrum of Successful Credit Projects in Floun-

dering Rural Financial Marketsrdquo Economic Development and CulturalChange vol 36 (January 1988) pp 355ndash67

Adams Dale W Douglas H Graham and J D Von Pischke eds Under-mining Rural Development with Cheap Credit (Boulder Colo WestviewPress 1984)

Binswanger Hans ldquoAgricultural Mechanization A Comparative Histori-cal Analysisrdquo World Bank Research Observer vol 1 (January 1986) pp27ndash56

Bouman F J A and R Houtman ldquoPawnbrokering as an Instrument ofRural Banking in the Third Worldrdquo Economic Development and CulturalChange vol 37 (October 1988) pp 69ndash99

Hayami Yujiro and Vernon W Ruttan Agricultural Development An Inter-national Perspective (Baltimore Johns Hopkins University Press 1985)pp 398ndash403

Hossain Mahabub ldquoCredit for Alleviation of Rural Poverty The GrameenBank in Bangladeshrdquo International Food Policy Research Institute Re-search Report No 65 Washington DC February 1988

Pingali Prabhu Yves Bigot and Hans P Binswanger Agricultural Mecha-nization and the Evolution of Farming Systems in Sub-Saharan Africa (Balti-more Johns Hopkins University Press 1987)

Robinson Marguerite The Micro Finance Revolution Sustainable Finance forthe Poor (Washington DC The World Bank 2001)


300

Sachs Jeffrey D Common Wealth Economics for a Crowded Planet (New YorkPenguin Books 2008)

Von Pischke J D Dale W Adams and Gordon Donald Rural FinancialMarkets in Developing Countries Their Use and Abuse (Baltimore JohnsHopkins University Press 1983)

Yaron Jacob ldquoWhat Makes Rural Financial Institutions Successfulrdquo WorldBank Research Observer vol 9 (1 1994) pp 49ndash70

Zeller Manfred and Richard L Meyer The Critical Triangle of Microfinancefrom Vision to Reality (Baltimore Johns Hopkins University Press 2003)


301

CHAPTER 15

Pricing Policies and Marketing

Systems

The links between price polices and food marketing take the foodpolicy analyst to the very core of an economy and the most basicissues concerning the consequences of market organization foreconomic efficiency and income distribution mdash C Peter Timmer

THIS CHAPTER1 Discusses the nature of markets how and why governments tend

to intervene in agricultural markets to affect prices and the resultsof those interventions

2 Explains the importance of efficient marketing systems and de-scribes how marketing systems have changed over time in develop-ing countries

3 Considers the role that government can play in providing market-ing infrastructure market information marketing services andregulations

PRICING POLICIESFood and agricultural prices are major determinants of producer incen-tives and real incomes in developing countries These prices are influ-enced by government policies and by the efficiency of marketing sys-tems Pricing policies and marketing systems have changed signifi-cantly over the past thirty years especially in response to domesticbudgetary and global market pressures The roles of government pro-cessors wholesalers and retailers are changing Governments in some

1 C Peter Timmer ldquoThe Relationship Between Price Policy and Food Marketingrdquo inFood Policy Integrating Supply Distribution and Consumption ed J Price GittingerJoanne Leslie and Caroline Hoisington (Baltimore Johns Hopkins University Press1987) p 293

302


developing countries continue to adopt pricing policies that reduce foodprices for urban consumers even if farmers are forced to bear the costsIn other developing countries increased integration into global mar-kets has resulted in freeing up of prices and in new approaches to pro-cessing marketing and regulating farm commodities and productsIronically in many developed countries where farmers are a muchsmaller proportion of the population government price interventionscontinue to support agricultural prices often at the expense of taxpay-ers and consumers and in some cases with deleterious effects on devel-oping countries Why do we observe these policies How are they imple-mented and what are their short- and long-run effects These ques-tions are addressed below followed in the next section by a discussionof the roles of agricultural marketing systems and how those systemshave changed over time

Reasons for Price InterventionGovernments intervene into agricultural price formation for two majorreasons to change the outcomes in agricultural markets themselvesand to raise revenue to pay for roads police and other public servicesThese interventions have a large influence on the welfare of both farm-ers and non-farmers Sometimes government policies reflect the long-run interest of society as a whole helping to stabilize and raise incomefor many people but often they reflect more narrow or short-run politi-cal objectives

The long-run interest of most societies calls for policies that (1)contribute to economic growth (2) improve income distribution or atleast meet minimum nutritional needs of citizens and (3) provide acertain measure of food security or stability for the country over timeGovernments vary widely in what they actually do and their choice ofpolicies helps explain the wide differences in economic outcomes acrosscountries and over time The choice of policy is much influenced byhow governments respond to key interest groups Urban consumerswant lower food prices particularly the poor who spend a large frac-tion of their income on food Employers also prefer low food priceswhich allow them to pay lower money wages But low food prices hurtagricultural producers and reduce investment in agriculture whichlowers farm productivity over time

In most developing countries the balance of political power fa-vors urban consumers and employers Although farmers are in themajority they are usually poorer are often illiterate and are geographi-cally dispersed across the countryside Thus political power with re-spect to food prices is centered in urban-industrial areas

303

As development proceeds and incomes grow several factors maycause the balance of political power within countries to shift towardshelping farmers if necessary at the expense of consumers First foodprices become less important in household budgets because the pro-portion of income spent on food declines with higher incomes Secondthe declining relative size of the agricultural sector makes it less costlyfor the government to succumb to pressures from farmers while at thesame time the reduced number and increased specialization of farmsimproves the ability of farmers to organize for collective action Thirdgovernments in richer countries have easier access to other sources oftax revenue outside the farm sector

The form of government interventions into agricultural commod-ity markets also shifts as development proceeds In the poorest coun-tries interventions often focus on international trade because that iseasiest to control Governments typically tax both imports and exportsand since poor countries often export farm goods and import manufac-tures the result is a tax on farmers and protection for local industriesIn somewhat higher-income developing countries governments oftenintroduce food-price subsidies and increasingly try to support farmincome as well At the highest levels of economic development per-haps the most important transition is towards increasingly well-tar-geted government programs that meet their political objectives withfewer side effects For example food price subsidies may be restrictedto benefit only the poorest consumers while farm subsidies may bemade less distorting

During early stages of development agricultural policies are of-ten highly inefficient partly because governments have limited admin-istrative capacity but also because citizens who lose from bad policymay be unable to organize against them Inefficiencies remain over timebut policies can improve as development proceeds due partly to thestructural transformation of the underlying economy but also to im-provements in political accountability

Methods of Price InterventionGovernments intervene to influence agricultural prices in several waysThey set price ceilings or floors and enforce them with commodity sub-sidies or taxes manipulation of foreign exchange rates commodity stor-age programs restrictions on quantities traded andor other policyinstruments Letrsquos examine how a few of these instruments work

Suppose the government wants to lower the price of rice an im-portant food in the diet The supply of rice must therefore be increasedin the market relative to demand Additional supplies can be created


304


by increasing imports or by stimulating domestic production In eithercase government revenues must be used to bridge the gap between theinitial price and the desired price ceiling Figure 15-1 presents an illus-tration of how the price ceiling and subsidy might work

The supply and demand schedules would intersect at price P0 and

quantity Q0 if there were no trade in rice However the country in this

example is assumed to be a rice importer so the world price of rice Pw

is below Po Initially at P

w and without government intervention quan-

tity Q1 is produced domestically Q

2 is demanded by consumers and

the difference Q2 ndash Q

1 is met by imports If the government desires to

artificially create a domestic price for rice Pd below the world price it

must pay a subsidy per unit of rice equal to the difference between theworld price and the desired domestic price (P

w ndash P

d) This subsidy could

be paid on a per-ton basis to commercial importers to cover their lossesfor importing rice at a price below what they pay on the world marketor it could be paid to a government agency that imports rice2 In eithercase the direct cost to the government of the subsidy is (P

w ndash P

d) times

Figure 15-1 Economics of a price ceiling and consumer subsidyto lower agricultural prices

2 C Peter Timmer Getting Prices Right The Scope and Limits of Agricultural Price Policy(Ithaca NY Cornell University Press 1986) p 36

305

(Q4 ndash Q

3) which equals area adeh in Figure 15-1 This kind of price ceil-

ing program is common in many African and Asian countries Con-sumers benefit but rice producers are hurt by the lower price of rice

Sometimes the government prefers not to allow scarce foreign ex-change to be spent on increased imports In this case farmers may belegally forced to sell their commodity to the government at a low priceFor example the government might force farmers to deliver Q

3 units of

rice at Pd Although nothing is imported the demand for rice (Q

4) ex-

ceeds its supply (Q3) The government must then ration rice to consum-

ers The shortage in the market provides incentives for farmers to selltheir crop illegally on the black market for a higher price Even if thegovernment allows adequate imports to meet the projected demand atthe lower price if the price of the product is higher across the borderfarmers will (usually illegally) sell in a neighboring country thus fur-ther reducing domestic supplies

One means to avoid reducing domestic production and illegal saleswhile at the same time supporting farm incomes is for the governmentto administer a two-price scheme in which producers are paid the worldprice but consumers pay only the subsidized price This type of systemis illustrated in Figure 15-1 Rather than paying adeh to importers thegovernment would pay P

wbgP

d or a subsidy of (P

w ndash P

d) times (Q

1 ndash 0)

to producers and a subsidy of bdeg or (Pw ndash P

d) times (Q

4 ndash Q

1) to im-

porters Producers would still receive Pw while consumers would face

a price of Pd

thus the name two-price scheme Of course an even highersubsidy could be paid to producers to further reduce imports and in-crease the producer price The obvious difficulty with this scheme is itsimpact on the government budget The subsidy costs have to be paidfor by some means Because of this cost few major commodities aresubsidized this way in developing countries although related schemesare common in developed countries such as the United States and Ja-pan and in Europe Two-price wheat programs have been operativehowever at various times in Brazil Egypt Mexico and a few otherlow-income countries Table 15-1 lists examples of past food subsidyprograms in developing countries

Developing countries often have food subsidy programs that aretargeted toward the poor or to nutritionally vulnerable groups Thesesubsidies can be implemented through ration shops ration cards foodstamps or other means Usually only the very poor are eligible to keepthe cost down but in some cases ration shops which sell basic grainsand other staples are located in poor neighborhoods under the theorythat only the poor will frequent them Alternatively self-targeting canbe achieved by subsidizing foods that the poor tend to buy such as


306


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un

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Pri

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ram

Fo

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Act

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co

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(im

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ho

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pre

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lact

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bsi

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ion

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and

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ain

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er f

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ce s

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To

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Mex

ico

Mai

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ce s

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ener

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ost

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oW

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eral

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ista

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eted

amp r

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All

ho

use

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(up

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197

7)R

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(fro

m 1

979)

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ed50

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307

starchy staples or maize Substantial savings can result from targetingin Sri Lanka targeting and program modification reduced outlays forconsumer food subsidies from 15 percent of total government expendi-tures to less than 3 percent3 The impact of targeted subsidies on agri-cultural prices and incentives depends on how they are financed butfood subsidies need not have adverse effects on agricultural incentives

Another common price-policy instrument in developing countriesis the export tax The purpose of an export tax is to raise governmentrevenues or reduce domestic commodity prices The effects of the taxare illustrated in Figure 15-2 Because the country exports the commod-ity the world price P

w is shown above the price P

0 which would have

prevailed domestically if there were no trade If exports were freelyallowed this world price would prevail in the domestic market and atotal quantity of Q

2 would be produced domestically Q

1 would be de-

manded by domestic consumers and the difference (Q2 ndash Q

1) would be

exported Then if an export tax equal to Pw ndash P

d were imposed the do-

mestic price would fall to Pd consumers would increase conshysumption

to Q3

producers would reduce the quantity supplied to Q4 exports

would decline to Q4 ndash Q

3 and the government would earn an export tax

revenue of (Pw ndash P

d) times (Q

4 ndash Q

3) or the area bcfg in Figure 15-2 Poor

countries may impose export taxes because they lack an alternativesource of revenue In the Figure 15-2 example the country is unable toinfluence the world price P

w because it is a small producer in the world

market for the commodity Domestic producers pay the cost of the taxthrough lower prices If the country is a large producer such as Brazilin the coffee market its exports and any export tax influence the worldmarket price Therefore part of the burden of the export tax can bepassed on to consumers in other countries

Governments follow many types of pricing policies those describedabove are among the most common and direct pricing instrumentsemployed in developing countries Another common direct-pricingpolicy is the attempt to stabilize commodity prices through a buffer-stock program With such a program supplies are purchased by thegovernment if the price drops below a certain minimum floor leveland then dumped on the market if the price rises above a certain ceilinglevel The purpose of the program is to stabilize short-run prices ratherthan alter the long-run price

3 Per Pinstrup-Andersen ldquoThe Social and Economic Effects of Consumer-OrientedFood Subsidies A Summary of Current Evidencerdquo Food Subsidies in DevelopingCountries (Baltimore Johns Hopkins University Press 1988) Chapter 1 pp 13ndash14


308


Figure 15-2 Economics of an export tax to raise revenue

Perhaps the most common indirect pricing policy in developingcountries is to overvalue the foreign exchange rate The foreign exchangerate is the value of the countryrsquos currency in relation to the value offoreign currency for example the number of Mexican pesos that equalone US dollar If the official foreign exchange rate implies that thelocal currency is worth more than it actually is and if exports occur atthe official rate then this overvalued exchange rate acts as an implicitexport tax However it does not provide tax revenue to the govern-ment More discussion of the trade effects of direct and indirect pricingpolicies is found in Chapters 16 and 18

Interventions to shift either the supply of or demand for agricul-tural products also affect prices Income transfer and employment pro-grams are examples of policies to shift demands Policies that steer in-vestments into different sectors credit programs agricultural researchand land reforms all affect supplies The net effect is to change equilib-rium prices in markets Governments can examine price trends and shiftsand treat them as indicators of an underlying problem In some casesthe problem is induced domestically but in other cases it is driven byinternational forces For example the rapidly increasing food pricesexperienced by most developing countries in 2008 were driven moreby international than domestic supply and demand factors

Prices provide important indicators of sector performance How-ever policies that attack the symptom mdash such as rapidly rising pricesmdash by perhaps directly imposing price controls can create long-run

309

damage to economic growth A preferred price intervention would beto address the causes of the problem by either investing in productiv-ity-enhancing technologies or by making more imports available Ifdemand lags behind supplies then programs to stimulate demandssuch as food stamps might be contemplated In general it is preferableto directly address the causes of undesirable price trends rather than todirectly intervene in the price formation process for reasons discussedbelow

Short- and Long-Run Effects of Pricing PoliciesA few of the direct short-run effects of food and agricultural pricingpolicies are illustrated in Figures 15-1 and 15-2 As producer and con-sumer prices are raised or lowered changes in production and con-sumption occur Producer incomes foreign exchange earnings pricestability and government revenues are also directly influenced by pricepolicies These and other direct and indirect short- and long-run ef-fects of pricing policies are summarized in Table 15-2

An important short-term effect of many price policies is to trans-fer income from producers to consumers Within consumer groups thepoor tend to be the most sensitive to food prices since they spend pro-portionately more income on food The poor are usually targeted eitherindirectly because a food they eat is subsidized or directly by beingprovided food stamps or access to ration shops However studies show

TABLE 15-2 SUMMARY of PRICE POLICY EFFECTS

Direct short-run effects of price policies1Changes in consumer and producer prices2 Changes in quantities produced and consumed3 Changes in exports imports and foreign exchange earnings4 Income transfers between and among consumer and producer groups5 Government budget effects6 Price stability effects7 Changes in marketing margins and their effects on efficiency of

resource allocation

Indirect and long-run effects of price policies1 Employment changes2 Incentives for capital investment3 Incentives for technical change4 Changes in health and nutrition5 Long-run changes in allocation of resources in production storage

transportation and processing


310


that even well-targeted price subsidy programs are associated with largeldquoleakagesrdquo to the non-poor These leakages imply higher program coststo the government and create distortions

A major feature of both direct and indirect effects of many pricepolicies is the influence of those policies on efficiency of resource allo-cation depending on the program In the short run resources are di-verted to less-productive uses because of the subsidy or tax Additionalindirect or long-run misallocation of resources can result as investmentsand structural changes occur that expand less-efficient sectors of theeconomy at the expense of more-efficient ones In addition efficiencylosses occur due to the resource costs associated with collecting taxesor administering the policy Food stamp and ration shop programs havefewer distortionary impacts because they shift food demands amongrecipient groups rather than working through price signals

Distortions in the normal price differences for a commodity acrosslocations between points in time and at different levels of processingcan influence storage transportation and processing of the commod-ity For example urban prices are normally expected to be higher thanrural prices for the same food commodity because of transportationcosts If the government sets a ceiling price that is equal in both ruraland urban areas transporting the good from the rural to the urban areamay no longer be profitable In fact in some cases governments havebeen known to set urban food prices lower than rural prices with theresult that food supplied by imports is transported from urban areasto rural areas

Likewise ceiling prices can discourage the normal seasonalstorage of a crop if prices are not allowed to rise to cover storagecosts Also if a government reduces the price margin allowed be-tween farm and retail levels processors and marketers can be forcedout of business

Pricing policies may be implemented through government pro-curement agencies with monopsonistic (single buyer) power Thus op-portunities are created for illegal garnering of rents by governmentemployees and inefficiencies can arise that may force additional re-ductions in farm prices These often unintended results of pricing poli-cies can be particularly severe in countries with poor communicationsand underdeveloped legal systems

Other indirect effects of pricing policies include employmentchanges incentives to develop and adopt new technologies and changesin health and nutrition If total revenues for one sector or commodityare raised through pricing policies more people may be employed Alsoproducer incentives to press private firms or public research agencies

311

for new technologies as well as incentives to adopt technologies maybe enhanced Consumer price subsidies can have important impacts onhealth and nutrition In cases where they are financed through govern-ment tax revenues and not by depressing producer prices they can bean effective means of transferring income to targeted groups

Once price policies are instituted they are difficult to repeal Ur-ban consumers in numerous countries have reacted in negative andsometimes violent manners to government attempts to lower subsidiesIn summary price-policy effects are pervasive and influence the effi-ciency of the production and marketing systems

MARKETING FUNCTIONS and DEFICIENCIESMarketing transforms products over time space and form through stor-age transportation and processing Through marketing goods are ex-changed and prices are set Markets communicate signals to producersprocessors input suppliers and consumers about the costs of buyingselling storing processing and transporting These major marketingfunctions and their linkages to price policies are summarized in Figure15-3

In the earliest stages of development and in remote areas a highproportion of the population lives on farms and is relatively self-sufficient The demand for agricultural marketing services is limitedAs development proceeds with resulting increased living standardsand urbanization the size and efficiency of the marketing system be-come more important Unless marketing services are improved con-currently with the development and spread of new technologies im-provements in education and credit and the other factors discussed inthis section of the book economic development will be hindered Aninefficient marketing system can absorb substantial private and publicresources and result in low farm-level and high retail-level prices

Marketing System Deficiencies in Developing CountriesPrivate marketing systems in many developing countries operate rela-tively well in that prices are influenced by underlying supply anddemand conditions Products are stored transported processed andexchanged in roughly the amounts expected given prevailing costs ex-cept where governments have intervened with price policies Pricerigging by opportunistic marketing agents is generally not a seriousproblem However because marketing costs can be high and some pricedistortions do occur marketing system deficiencies may retard the rateof agricultural growth and influence the distribution of the benefits of


312


that growth Letrsquos consider the nature of these deficiencies before turn-ing in the following section to the possible public role in solving them

The principal weaknesses in marketing systems in developingcountries are (1) infrastructure deficiencies which raise the cost of trans-port (2) producersrsquo lack of information (3) the weak bargaining posi-tion of producers of certain commodities and (4) government-inducedmarket distortions The magnitude of each of these deficiencies differsacross regions and by country and is changing for the better in many

Figure 15-3 Links between agricultural price policy and agricultural mar-keting (Source C Peter Timmer ldquoThe Relationship Between Price Policy andFood Marketingrdquo in Food Policy Integrating Supply Distribution and

Consumption ed J Price Gittinger Joanne Leslie and Caroline Hoisington(Baltimore Johns Hopkins University Press 1987) p 294)

313

countries but severe problems are found in some countries particu-larly in Sub-Saharan Africa The most visible effect of these weaknessesis to create a large spread between the prices producers are paid fortheir products and the retail prices Marketing system deficiencies alsocreate wide variations in producer prices within countries and withinyears Examples of producerretail price spreads and of intra-countryprice variations are presented in Table 15-3 for selected countries inAfrica and Asia The Sub-Saharan African countries have larger pricespreads than do the Asian countries indicating more-deficient mar-keting systems

Good communications (eg roads railroads telephones postalservices) and storage infrastructure are crucial to a well-functioningagricultural marketing system The availability and quality of ruralroads in particular have a strong influence on marketing costs and onthe willingness of farmers to adopt new technologies and sell any sur-plus production A farmer who has only a few hectares may still haveto market several tons of output to generate revenue needed to applynew seeds fertilizers and other modern inputs Telephones postal ser-vices radio stations and so on increase access to information Modernstorage facilities are important to minimize rodent insect and waterdamage while commodities are being held Most storage occurs on thefarm or at facilities owned by private traders Storage may also be pro-vided by the government for buffer stocks and food distribution pro-grams

Producers require information to improve market efficiency andreduce transactions costs as discussed in Chapter 11 Unequal accessto information can give a competitive advantage to particular groupsof farmers or traders who have more information When roads basictelecommunications and news services are lacking or are available onlyto a few those with better information on market prices crop pros-pects prospective changes in international forces and so on can earnhigher profits and in some cases gain political power as well Thusaccess to information is of fundamental importance for agriculturaldevelopment The wireless communications revolution is having a pro-found effect on information availability and hence marketing efficiencyLow-cost cell-phones are widely available in developing countries evenin relatively remote rural areas Vegetable producers from China toBrazil now receive price information through cell-phones Coffee pro-ducers in the Guatemalan highlands use beeper technology to receiveup-to-the-minute price information These innovations lower the costof attaining information enable farmers to retain more value on their


314


TABLE 15-3 PRODUCERCONSUMER and REGIONAL

PRICE SPREADS SELECTED AFRICAN and ASIAN COUNTRIES

Producerconsumera Regionalb

Country Commodity Price spread spread

Nigeria Maize 545 356Rice 570 729Sorghum 598 459

Malawi Maize 482 219Rice 551 682

Tanzania Maize 382 257Rice 566 613Sorghum 481 355

Kenya Maize 420 300

Sudan Sorghum 612 482Wheat 521

Indonesia Rice 840 719

India Rice 820 689Wheat 795 659Sorghum 800 635

Bangladesh Rice 790 750

Philippines Rice 878 827Maize 715 642

aProducer priceretail price X 100 bLowest pricehighest price X 100

Source Raisuddin Ahmed ldquoPricing Principles and Public Intervention in Domes-tic Marketsrdquo Chapter 4 in Agricultural Price Policy for Developing Countries edJohn W Mellor and Raisuddin Ahmed (Baltimore Johns Hopkins UniversityPress 1988) p 67

farms and enhance planning for deliveries lowering waste and im-proving efficiency

The structure of agricultural markets is usually such that the num-ber of middle agents is smaller than the number of producers Econo-mists hold differing views on whether relatively fewer such intermedi-aries result in monopolistic power on the part of the intermediary andan unfair bargaining advantage One needs to be cautious in drawing

315

Roadside market in Bangladesh

conclusions Because the more efficient traders and processors tend todeal in large volumes there are naturally fewer of these people thanthere are producers On the other hand in most countries with privatemarketing systems ease of entry is such that there are still enough pro-cessors and other middle agents to provide competition for each otherExamples of collusion and monopolistic power however undoubtedlyexist for certain products particularly in isolated areas where infor-mation is costly and where social and cultural factors play a contribut-ing role This form of market power is undergoing pressure from thetelecommunications revolution described above

A common marketing problem for producers of major commodi-ties in some developing countries is a situation in which government-controlled marketing organizations (often called parastatals) are givenmonopolistic power and legal authority to purchase all of a productwhile setting its price as well (see Box 15-1) As discussed in the price-policy section these tightly controlled markets can have negativeeffects on producer incentives and market efficiency Agricultural eco-nomic systems are inherently complex A large amount of informationis transmitted through market signals and decisions made by centralmarketing boards and parastatal agencies can create serious market dis-tortions If these types of government agencies are a cause of ratherthan a solution to marketing problems in developing countries howmight the public sector improve marketing efficiency This issue is ad-dressed in the following section


316


THE ROLE of the PUBLIC SECTOR in AGRICULTURAL

MARKETINGThe primary role of the government is to provide the infrastructurerequired for an efficient marketing system particularly roads a marketinformation system a commodity grading system and regulations toensure the rights of all participants The underlying rationale for gov-ernment involvement is the presence of public goods and market fail-ures creating externalities Public goods provide benefits to society as awhole but would be supplied in less than the socially desirable amountsby the private sector alone Externalities involve often unintended posi-tive or negative effects of the actions of one person (firm) or persons(firms) on other people

BOX 15-1

COMMODITY MARKETING BOARDS in SUB-SAHARAN AFRICAIn some Sub-Saharan African states publicly-sanctioned monopolies stillpurchase and export agricultural goods These marketing boards serve asthe sole buyers of major exports purchase crops at administratively deter-mined prices and sell them at prevailing world market prices These statemarketing agencies are vestiges of the colonial period and their originsand histories vary considerably Many were established during the GreatDepression of the 1930s or World War II Their official mandates werealmost invariably to benefit producers by reinvesting revenues in agricul-ture and especially stabilizing producer prices

As the colonial governments were confronted with growing needs forrevenues they quickly found ways of diverting marketing board funds awayfrom agricultural development and into general revenue coffers Followingindependence African governments continued to use the commodity mar-keting boards as extensions of their normal revenue-generating arms andthe initial purposes of the boards were ignored Examples are found inGhana and Nigeria immediately following independence

Since colonial times these boards have been used to transfer re-sources from agriculture into ldquomodernizingrdquo and mostly urban developmentThey have served political objectives by raising revenues increasing em-ployment of favored groups and keeping primary commodity prices low tobenefit urban and industrial concerns The boards never really fulfilled theirmandate to improve and stabilize conditions in agriculture In combinationwith other policy distortions they contributed to the stagnation and declineof agriculture in many African countries

317

Provision of InfrastructureThe private sector can be expected to build many of the required stor-age facilities processing plants and so on but investments in roadsseaports airports and in most cases telecommunications will requiregovernment involvement One firm or even a small group of firmswill lack the incentives to build sufficient roads not just because oftheir high cost but because of the difficulty of excluding others from orcharging for their use Roads are a public good that serve all industriesconsumers and national defense

Several studies have estimated the economic importance of roadsto agriculture in developing countries For example Spriggs estimateda benefitcost ratio of 8 for surfaced roads in the eastern rice regions ofIndia4 Ahmed and Hossain estimated that incomes were roughly one-third higher for villages with better infrastructure compared to thosewith poor infrastructure in Bangladesh5 Fan and Chan-Kang foundthat even low-quality rural roads in China are excellent investmentswith a 5-1 benefit cost ratio6 The evidence in numerous countries sug-gests that investments in infrastructure have greatly narrowed farm-retail margins

Provision of InformationProvision of accurate crop and livestock reports requires investmentsin data collection and dissemination Production and consumption datamay be poor quality but accurate data on marketed quantities quali-ties and prices can give essential information for formulating agricul-tural policies and for decisions by individual economic agents

To ensure equal access to information data need to be collected inall-important markets and disseminated on a regular basis Informa-tion on current market prices crop prospects and factors influencingdemand can be spread through radio broadcasts and newspapers oncethe government reports are released An efficient competitive marketrequires widespread access to information Otherwise a small group

4 John Spriggs ldquoBenefit-Cost Analysis of Surfaced Roads in the Eastern Rice Region ofIndiardquo American Journal of Agricultural Economics vol 59 (May 1977) pp 375ndash79

5 Raisuddin Ahmed and Mahabub Hossain Developmental Impact of Rural Infra-structure in Bangladesh International Food Policy Research Institute ResearchReport No 83 (Washington DC October 1990) p 70

6 See Shenggen Fan and Connie Chan-Kang Road Development Economic Growthand Poverty Reduction in China International Food Policy Research Institute Re-search Report No 138 )Washington DC 2005) Chapter 4 in this research reportcontains an extensive review of research findings about infrastructure and incomegrowth in developing countries


318


of large-scale farmers traders or processors can gain market power atthe expense of small farmers particularly those in remote areas Theseagents can then use the resulting profits to influence political and eco-nomic policy to favor themselves The result is both efficiency losses(reduced economic growth) and distributional inequities

In economies highly oriented toward subsistence production mar-kets offer few premiums for higher-quality products As interregionalcommunication and particularly export trade develops quality stan-dards increase in importance because buyers need to compare the prod-ucts of many different sellers often without seeing the product beforethe sale In markets using modern technology purchases are often madeelectronically or over the phone something that can only happen witha recognized system of grades and standards

Threshing drying cleaning storage and processing practices forcrops and feeding slaughtering storage and other practices for live-stock influence the quality of the final product Unless grades and stan-dards are established with corresponding price differentials then pro-ducers and processors have little incentive to incur the costs of produc-ing higher quality goods

RegulationsMarket regulations related to factors affecting health and safety butalso to weighing practices and other legal codes that influence the en-forceability of contracts are important to a well-functioning marketingsystem The purposes of many of these regulations are to ensure basichonesty and reduce transactions costs in marketing As discussed inChapter 11 development brings with it a reduction in personal exchangeand associated social and cultural constraints on behavior Increasedimpersonal exchange requires new institutional arrangements to sub-stitute for the rules of behavior that had been imposed previously by amore personal society

The importance of market regulations does not imply a need forheavy involvement of government marketing boards or other publictrading agencies Banning private marketing activities does not improvethe welfare of either farmers or consumers While there is a role for thegovernment in the activities discussed above and perhaps in imple-menting a price stabilization scheme more extensive public monopoli-zation of domestic marketing functions tends to produce high market-ing costs and large market distortions

319

THE CHANGING STRUCTURE of FOOD MARKETSAt the retail level in developing countries there has been a restructur-ing in urban areas which began in earnest during the 1990s towardincreased involvement of large wholesalers and supermarkets in foodmarketing In a few cases the supermarkets are owned by multina-tional companies and in most cases the result has been higher qualityproducts and more efficient (lower-cost) marketing These markets arehowever increasingly forcing small-scale retailers out of business justas they did in many developed countries Before the advent of super-markets local brokers or small-scale wholesalers brought relativelyundifferentiated commodities from the rural areas to small shops orcentral markets in the urban areas In most of the developing worldthis structure still predominates However increasingly large and of-ten specialized wholesalers bring products from the rural areas to largerprocessors supermarkets and food service chains in urban areas7

As market structures change they do so unevenly in the develop-ing world with urban retail markets changing before rural marketsand certain geographic areas undergoing a more rapid transformationthan others For example according to Reardon and Timmer the de-gree of transformation is greatest in South America East Asia outsideof China and North-central Europe The second wave of market changeis occurring in Central America and Mexico Southeast Asia South-central Europe and South Africa and the third wave is just beginningin South Asia China Eastern Europe and parts of Africa8

The market transformation tends to include five sets of changes(1) a shift from raw commodities to more specialized products (2) rapidorganizational change involving consolidation in the processing andretail segments of the food system with the rise of supermarkets (3)institutional change in the markets with the rise of contracts andprivate grades and standards for food quality and safety (4) rapid tech-nological and managerial change among suppliers wholesalers andretailers and (5) distributional and technological impacts of the whole-sale and retail market changes back on farmers

Efforts are needed to prepare poor and small-scale producers toaccess these new marketing channels improve quality adhere to size

7 See Thomas Reardon and C Peter Timmer ldquoTransformation of Markets for Agricul-tural Output in Developing Countries Since 1950 How Has Thinking ChangedrdquoChapter 13 in Handbook of Agricultural Economics Volume 3 Agricultural Develop-ment Farmers Farm Production and Food Markets ed RE Evenson P Pingali andTP Schultz (Amsterdam Elsevier 2006)



320


and other standards and develop organizational and contracting skillsOff the farm impacts of this retail revolution on participants in tradi-tional supply and retailing channels are not well-understood but maybe substantial Reardon and Timmer provide a detailed synopsis of whathas occurred in food markets in developing countries since the 1950sand the reasons for those changes9

The growth in demand for horticultural products that has occurredas incomes have grown over time especially in Asia has producedopportunities for small-scale producers if they can organize intermedi-ate-level assembly of high quality products to fill contracts with whole-salers and even retailers Efforts to organize small vegetable and fruitproducers into cooperatives and other group associations for this pur-pose has the potential to significantly raise incomes The public sectorcan assist by providing information to meet the demands in the marketchain for these relatively high value products (see Box 15-2)


BOX 15-2

DEVELOPMENT of VEGETABLE MARKET INTERMEDIARIES

in NEPALMarketing of horticultural products is a major challenge in Nepal becauseof the large number of smallholder producers in geographically isolatedareas with poor infrastructure High transaction costs in aggregating pro-duction to marketable volume and limited market information constrain ef-ficient and competitive marketing The large number of small producershinders quality control and coordinated production scheduling Abundantfamily labor reduces labor supervision costs but a mechanism is neededto coordinate product marketing beyond the farm level With public sup-port a series of local marketing and planning committees (MPCs) havebeen established to manage community market collection centers Throughthese collection centers produce is sold to traders who have access tolarger more lucrative markets than are available locally This institutionalmechanism has been highly successful and grown rapidly since 2003 TheMPCs provide information to help their members plan market-led produc-tion and they provide loans for agricultural inputs They also lobby the gov-ernment to influence policy Each MPC has representatives from five to 12farmer groups each of which has 15-20 members When an MPC is well-established it can register as a cooperative and gain legal backing thatmakes available more attractive financing options

321

SUMMARYFood and agricultural prices are major determinants of producer incen-tives and of real incomes in developing countries Governments in thosecountries often adopt pricing policies to reduce food prices for urbanconsumers at the expense of producers Political leaders devise policiesto meet societyrsquos objectives and the demands of interest groups to gen-erate revenue and in some cases to line their own pockets Govern-ments can influence agricultural prices by setting price ceilings or floorsand enforcing them with subsidies taxes manipulation of exchangerates storage programs quantity restrictions and other policy instru-ments These interventions influence producer and consumer prices andincomes production and consumption foreign exchange earnings pricestability government revenues the efficiency of resource allocationemployment capital investment technical change health and nutri-tion and marketing margins

Marketing refers to the process of changing products in time spaceand form through storage transportation and processing Goods areexchanged and prices are determined in markets The importance ofthese functions increases as markets become more commercializedDeveloping countries often have marketing systems characterized bydeficient infrastructure inadequate information weak bargaining po-sition for producers for certain commodities and government-induceddistortions The government can help solve certain marketing deficien-cies particularly the lack of roads and information The public sectorcan provide a system of grades and standards as well other regula-tions These contributions can help reduce transactions costs that riseas markets become less personal Governments should avoid the largerparastatal marketing agencies that tend to introduce marketing distor-tions

Private marketing systems have gradually evolved over the past50 years in developing countries with many countries currently expe-riencing a shift from raw commodities being sold in small shops to moredifferentiated food products being assembled and processed by largerwholesalers Supermarkets are increasingly opening in the urban areasof the richer developing countries This market consolidation is likelyto continue at a fast pace in the future and will have profound impactson producers consumers and middle agents


322


IMPORTANT TERMS and CONCEPTSBuffer-stock programs Middle agentsCompetitive market MonopsonyExport tax ParastatalExternalities Price ceilingForeign exchange rate Price distortionsGrading system Price floorInfrastructure Price formationInterest groups Pricing policiesMarket information Public goodMarket regulations Resource allocation efficiencyMarketing board SupermarketsMarketing functions Time space and formMarketing margin Two-price programs

Looking AheadThis chapter concludes the discussion of technical and institutional fac-tors that can influence development of the agricultural sector The fol-lowing set of chapters moves beyond the agricultural sector and con-siders international trade macroeconomic forces international capitalflows and other policies that feed back on agricultural developmentWe begin in the next chapter by considering the importance of interna-tional trade Problems faced by developing countries with respect toagricultural trade and potential solutions to those problems are ex-plored

OUESTIONS for DISCUSSION1 Why do developing country governments frequently set agricul-

tural prices below market levels2 Why do governments get involved in stabilizing prices3 What are the direct short-run effects of price policies in agriculture4 What are the indirect and long-run effects of price policies in

agriculture5 Draw a graph to illustrate the effects on supply and demand of a

price ceiling set above the market equilibrium price6 Draw a graph to illustrate the effect of a price support to farmers

set above the market equilibrium price7 What are the major food marketing functions Why are these

functions necessary to get agriculture moving in developingcountries

8 What are the major deficiencies in agricultural marketing systemsin developing countries

323

9 What role might the government play in improving an agriculturalmarketing system

10 Discuss the potential role of buffer stocks in an agricultural devel-opment program in a developing country

11 Why might government marketing boards and parastatals createinefficiencies in resource use

12 Why do governments in developing countries use export taxes onagricultural commodities more frequently than do governmentsin more developed countries

13 Why does the increasing impersonal exchange that accompaniesdevelopment imply a need for increased government regulation

14 Why are marketing grades and standards important15 Why does increased market information improve marketing

efficiency16 What has happened to the growth of supermarkets in developing

countries over the past few years and why

RECOMMENDED READINGSAnderson Kym and Yujiro Hayami The Political Economy of Agricultural

Protection (Sydney Allen and Unwin 1986)Byerlee Derek and Gustavo Sain ldquoFood Pricing Policy in Developing

Countries Bias Against Agriculture or for Urban Consumersrdquo Ameri-can Journal of Agricultural Economics vol 68 (November 1986) pp 961ndash69

Fan Shenggan and Connie Chan-Kang Road Development Economic Growthand Poverty Reduction in China International Food Policy Research Insti-tute Research Report No 138 (Washington DC 2005)

Gittinger J Price Joanne Leslie and Caroline Hoisington eds Food PolicyIntegrating Supply Distribution and Consumption (Baltimore JohnsHopkins University Press 1987)

Krueger Anne O Maurice Schiff and Alberto Valdes ldquoAgricultural In-centives in Developing Countries Measuring the Effects of Sectoral andEconomywide Policiesrdquo World Bank Economic Review vol 2 (September1988) pp 255ndash71

Pinstrup-Andersen Per ed Food Subsidies in Developing Countries (Balti-more Johns Hopkins University Press 1988)

Reardon Thomas and C Peter Timmer ldquoTransformation of Markets forAgricultural Output in Developing Countries Since 1950 How HasThinking Changedrdquo Chapter 13 in Handbook of Agricultural EconomicsVolume 3 Agricultural Development Farmers Farm Production and FoodMarkets ed RE Evenson P Pingali and TP Schultz (AmsterdamElsevier 2006)


324

Streeten Paul What Price Food Agricultural Price Policies in Developing Coun-tries (Ithaca NY Cornell University Press 1987)

Timmer C Peter Getting Prices Right The Scope and Limits of AgriculturalPrice Policy (Ithaca NY Cornell University Press 1986)

Timmer C Peter Walter P Falcon and Scott R Pearson Food Policy Analysis(Baltimore Johns Hopkins University Press 1983) Chapter 4


325

PART 5

Agricultural Development in anInterdependent World

Wheat being loaded on a ship

326

327

CHAPTER 16

Agriculture andInternational Trade

The evidence over the past four decades is suggestive hellip that im-proved trade opportunities for developing countries hellip could makean important contribution to growth and hence poverty reductionover time mdash William R Cline1

THIS CHAPTER1 Explains why countries trade2 Describes the recent experience of developing countries with trade

and why trade patterns change as economic development occurs3 Discusses problems that impede developing countries from realizing

their trade potential with respect to agriculture

WHY COUNTRIES TRADEThe role of international trade in economic development was one of thefirst questions ever addressed by economists and has been hotly de-bated throughout history (see Box 16-1) Today despite some views tothe contrary most scholars agree that relatively open trade is helpfulfor successful economic development and that government trade re-strictions generally make growth slower and less sustainable In thischapter we ask why open trade facilitates growth and also why somany governments choose to restrict trade despite its potential eco-nomic benefits

Need for Imports and ExportsTrade facilitates development because it helps a country obtaingreater benefits from its productive resources by exporting what it

1 William R Cline Trade Policy and Global Poverty (Washington DC Institute for In-ternational Economics 2004) p 45

328


can produce relatively easily and importing items that are relativelymore difficult to produce Most countries import and export the samegoods year after year but especially in agriculture there can be widefluctuations in the quantities traded due to temporary shortages or sur-pluses Absorbing change through fluctuations in trade volume can helpkeep domestic prices more stable than they would be with no change inquantities traded Furthermore most countries also run persistent tradesurpluses or deficits from year to year with offsetting flows of capitalinto or out of the country Net inflows of foreign investment are matchedby trade deficits and net outflows are linked to trade surpluses Wheninvestment flows change there may be a sudden need to alter tradepatterns accordingly

BOX 16-1HISTORICAL ROOTS of INTERNATIONAL TRADE DEBATE

Trade among countries has existed for thousands of years most of thattime in a very loosely structured system By the sixteenth and seventeenthcenturies money goods and credit markets had developed to facilitatetrade and colonial expansion An economic doctrine known as mercantil-

ism encouraged exports but discouraged imports The preferred form ofpayment was gold rather than goods A wide range of restrictive trade poli-cies was implemented including tariffs licenses export subsidies andgeneral state control of international commerce As the Industrial Revolu-tion spread in the late 1700s mercantilist ideas were increasingly ques-tioned Raw materials for expanding factory output were imported andmarkets for the output were sought abroad Technological advances intransportation and communications further stimulated trade

A strong movement toward economic liberalization began in the early1800s Perhaps the most important factor in the movement was the unilat-eral removal of trade restrictions in the United Kingdom The worldrsquos lead-ing economic power at the time the United Kingdom repealed its CornLaws in 1846 ending the worldrsquos first major price-support program for ag-ricultural commodities Britain then sought worldwide trade liberalizationwith some success World trade was relatively free until World War I al-though several countries including the United States and Germany fol-lowed selective protectionist policies World War I changed the tradingenvironment Industries including agriculture that had expanded duringthe war suffered slack demand and falling prices afterward Governmentsattempted to protect these industries by introducing protectionist policiesduring the 1920s and 1930s that the world is still struggling to removetoday Persistent protectionist policies for agricultural products are espe-cially evident

329


Comparative AdvantageSurprisingly the rationale for trade does not depend on absolute costdifferences between countries Absolute cost differences determine acountryrsquos wealth not its pattern of trade Trade is driven by relative costdifferences among goods within each country as countries export goodswhose cost is relatively low in terms of other goods This principle ofcomparative advantage first articulated by David Ricardo in 1817 statesthat it is best for each country to export those goods for which it has thegreatest relative cost advantage and to import goods which are rela-tively more costly The principle implies that one country could pro-duce all goods at lower cost than other countries yet it would still raiseits standard of living through trade exporting what it produces rela-tively best (see Box 16-2) What counts is the opportunity cost in terms ofother goods

Despite the logic of comparative advantage and the historical evi-dence of gains from trade governments routinely intervene to limitimports and exports Contemporary economists usually explain theseinterventions in terms of differences in lobbying power among thosewho gain and those who lose from these interventions as described inthe next section Other observers however may argue that trade re-strictions are actually in the countryrsquos national interest Proponents oftrade restrictions often claim that trade opens the economy to increasedexploitation by the more-developed countries by multinational corpo-rations and other actors in international markets and by the wealthyelites within their own countries Another important argument againstopen trade has been that the terms of trade or the prices received forexports from developing countries compared to the prices paid for im-ports tend to decline over time (see Chapter 6 for a discussion of thisldquostructuralistrdquo perspective) Prices for developed-country products arealso said to be high because of monopolistic behavior by sellers of de-veloped-country products that are imported by developing countriesand protectionist measures by governments in the more-developedcountries Some have also argued that dependence on internationalmarkets for food endangers national security since international mar-kets are volatile and unpredictable Finally advocates for trade restric-tions have argued that ldquoinfant industriesrdquo may need to be protectedfrom international competition in order to survive The solutions to theseperceived problems are import-substitution policies that try to move acountry towards self-sufficiency Examples of these policies are directimport restrictions setting of foreign exchange rates above the marketequilibrium (which discourages exports for reasons discussed below)

330


BOX 16-2ILLUSTRATION of the PRINCIPLE

of COMPARATIVE ADVANTAGETo illustrate the principle of comparative advantage consider two coun-tries each of which can choose how much to produce of two kinds ofoutputs manufacturing (MFG) and agriculture (AGR) The production pos-sibilities frontier (PPF) for each country is shown below indicating themaximum (or total) amount of MFG and AGR that each country can pro-duce given their resources and technology For simplicity both PPFs areshown as straight lines In our example country A can produce 15 units ofMFG and no AGR or 10 units of AGR and no MFG and any combination inbetween such as 75 MFG and 5 AGR Country B can produce up to 40units of MFG and no AGR or 20 units of AGR and no MFG or any combi-nation in between

Each country can potentially gain from trade by exporting what it canproduce at a lower relative cost as compared to the other country In thisexample the relative cost of production is shown by the slopes of the PPFlines In country A each unit of AGR costs 15 unit of MFG to producewhereas in country B that same unit would cost 2 units of MFG As a resulta trader could buy a unit of AGR in country A for a bit more than 15 units ofMFG and sell it to someone in country B for a bit less than 2 units of MFGproducing a total gain from trade of almost 5 units of MFG per unit of AGRthat is exported from A to B

How the gains from trade are divided between the countries dependson the relative bargaining power and the demands for MFG and AGR ineach country but the overall size of the gains and the direction of tradedepend only on differences in relative costs It does not matter whether A isalways less productive than B or AGR is always less productive than MFGCountry A can still exploit its comparative advantage in this case by spe-cializing in and exporting AGR to obtain more of both goods than it couldproduce in self-sufficiency Likewise Country B can exploit its comparativeadvantage (relative cost advantage) in MFG by specializing in and export-ing MFG to Country A

331


and export taxes that discourage exports and stimulate production forthe local market instead

Although most economists favor freer trade there are debateswithin economics regarding (1) the degree to which any gains fromtrade will in fact be retained in the developing country and be rela-tively broadly distributed and (2) the magnitude of the efficiency lossesresulting from attempts to become relatively self-sufficient throughimport-substitution policies Few dispute the potential for gains fromtrade most desire that any gains be broadly distributed and most agreethat increased trade can result in both gainers and losers even if totalgains are larger than total losses

In recent decades most countries have chosen to be relatively opento international trade with some variation in the degree of opennessMost empirical evidence supports the view that trade restrictions typi-cally limit economic development In fact when the world or a groupof countries wants to punish a nation the first step taken is often torefuse to trade with it

Gainers Losers and the Politics of Trade PolicyDespite the potential for significant economic gains from trade and ac-companying specialization international trade policies are a frequenttopic of bitter dispute Policy makers farm groups consumer advo-cates labor leaders and environmental groups constantly debate thebenefits and costs of trade restrictions that affect exports imports thebalance of payments prices jobs and the environment A major reasonfor such contentiousness is that some people will lose from freer tradeeven as others gain Much of the tendency for governments to restricttrade stems from the fact that trade restrictions can generate highly con-centrated and easily visible gains while spreading their cost broadlyamong the population over time For example protecting a particularindustry generates immediate high-wage employment and other ben-efits in that sector at a cost that is spread over many other activities inthe country Advocates for the protection can readily identify the win-ners and tell their story whereas the losses can be seen only throughabstract reasoning and aggregate statistics

The groups which are best able to act collectively and lobby policymakers tend to see trade policies enacted in their favor even thoughdoing so may impose even greater costs on other less influential groupsAgricultural lobbies are particularly strong in Europe and Japan andhave obtained relatively large income transfers from other sectorsWithin the United States some commodity groups such as those forsugar and cotton have been particularly successful in securing

332


government benefits over time Representatives of various sectors maylobby together for favorable policies forming coalitions either withinor across larger political parties and interest groups

An important fact about trade policy is that while the debate of-ten focuses on foreign countries the actual effect of a policy changeoccurs mainly within the restricting country Any trade restriction mayhave some impact on world prices and hence economic conditions inforeign countries but most of its effect is on domestic prices and in-come transfers among the countryrsquos own citizens

DEVELOPING COUNTRY EXPERIENCE with TRADEDuring the 1950s and 1960s import-substitution policies predominatedin many developing countries These inward-oriented policies helpedproduce a decline in the ratio of exports to GDP in many developingcountries until the early 1970s Since that time the ratio of exports toGDP has generally increased paralleling an overall expansion in worldtrade However many developing countries still pursue import-substitution policies Countries that followed these policies for severalyears for example Argentina India and Egypt tended to grow moreslowly than those that followed more open-trading regimes for exampleMalaysia South Korea and Botswana While it is difficult to generalizebased on a few cases studies that have examined the overall statisticalsignificance of trade restrictions have generally found a negative im-pact on economic growth

It is often difficult to classify a country as relatively open or rela-tively restricted because policies change over time Many African gov-ernments for example imposed increasingly restrictive agriculturaltrade policies on themselves in the 1970s and then moved to more openagricultural trade in the 1990s2 The Mexican economy was quite closeduntil 1985 but has been relatively open since then Even South Koreawhich is often cited as an example of a successful export-orientedeconomy has imposed substantial restrictions on trade from time totime Trade intervention is usually a matter of degree

Changing Structure of TradeTotal trade has grown for developing countries over the past 30 yearsBut the share of agricultural exports in developing country trade hasdeclined steadily from about 60 percent of total exports in 1955 to about20 percent in recent years This lower share partly reflects the import-

2 For details see Kym Anderson and William A Masters eds Distortions to Agricul-tural Incentives in Africa (Washington DC The World Bank 2008)

333


substitution policies mentioned above but it mainly reflects the impactof income growth with faster increases in both demand and supply ofmanufactures than of agricultural products at the global level as wellas increased domestic demand for food within developing countriesNevertheless several developing countries still depend on a few agri-cultural exports for a major share of their foreign exchange earnings

The dramatic shift in export composition towards manufactures isbest illustrated by Southeast Asian countries such as Indonesia Malay-sia The Philippines Singapore and South Korea with the data shownin Table 16-1 As these countries invested in human and physical capi-tal their comparative advantage in exports shifted from land-intensiveand low-skill labor-intensive activities such as agriculture to more skill-intensive and capital-intensive products such as manufactures Agri-cultural exports were often a very important source of foreign exchangeearnings in the past but other sectors grew faster over time

As countries develop their agricultural sectors do not disappearbut tend to become more specialized Tropical countries have a naturalcomparative advantage in relatively heat-tolerant tree crops such ascoffee cocoa tea rubber and bananas or other crops that grow year-round such as sugar Technological change can affect where crops growbest as shown for example by the increased exports of citrus and soy-beans from developing countries

Increased demand by more-developed countries for many of theagricultural exports of developing countries are limited due to rela-tively small income elasticities of demand for those commodities andin some cases to the development of synthetic substitutes (eg for rub-ber jute sisal cotton) On the other hand domestic demand for foodwithin the developing countries often increases rapidly with develop-ment Not only are populations growing but a high proportion of anyincome increases are spent on food The quantity consumed increasesand the mix of foods shifts toward more expensive products (often meatsand vegetables wheat and certain other grains rather than roots) As aresult the more rapidly growing middle-income countries have actu-ally become less self-sufficient in food production over the past twodecades even as their agricultural production and incomes have risenTheir increased imports have come partly from other developing coun-tries and partly from high-income food exporters such as the UnitedStates

Some countries have reacted to increased domestic demand forfood by setting artificially low prices for food commodities and over-valuing their exchange rates to tax exports and lower the prices of im-ports These policies tend to be counterproductive as they discourage

334


TA

BL

E 1

6-1

S

TR

UC

TU

RE

of

EX

PO

RT

S f

or

SE

LE

CT

ED

SO

UT

HE

AS

T A

SIA

N C

OU

NT

RIE

S 1

96

5ndash

20

05

P

erce

nta

ge

shar

e o

f to

tal

mer

chan

dis

e ex

po

rts

Ag

ricu

ltu

ral C

om

mo

dit

ies

Man

ufa

ctu

red

Pro

du

cts

Co

un

try

19

65

19

75

19

85

19

95

2005

1

96

51

97

51

98

51

99

52

00

5

Ind

on

esia

46

12

67

50

11

35

14

7M

alay

sia

50

34

18

62

51

72

77

57

5P

hil

ipp

ines

25

10

51

16

12

27

41

89

Sin

gap

ore

26

12

41

03

04

25

18

48

1S

ou

th K

ore

a9

21

11

59

81

91

92

91

No

te

Ind

on

esia

dat

a fo

r 19

65 a

re m

issi

ng

v

alu

es s

ho

wn

are

fo

r cl

ose

st a

vai

lab

le y

ear

(196

2)

Sou

rce

Wo

rld

Ban

k

Wo

rld

Dev

elo

pm

ent

Ind

icat

ors

200

9 (o

nli

ne

at w

ww

wo

rld

ban

ko

rg

dat

a)

335


production The effects of exchange rate manipulation are discussed inmore detail in Chapter 18

Trade Employment and Capital InteractionsEmployment growth is crucial for economic development While fewpeople are totally idle there is clearly underemployment in most de-veloping countries By underemployment we mean people working onlypart-time or in very low-productivity jobs Several possible linkagesexist between trade and employment One such linkage is the effect oftrade on overall growth through more efficient resource allocation as-suming faster growth entails more employment A second linkage isthat export industries in countries in early stages of development tendto be labor-intensive consistent with the Factor Endowment Theory ofTrade (see Box 16-3) Thus increased exports might lead to greater em-ployment A third possible linkage is that trade policies might influ-ence the degree of labor intensity in all industries For example tradepolicies might encourage capital-intensive industries through subsi-dized capital-goods imports

Empirical evidence suggests that increased exports from develop-ing countries including agricultural exports have positive employmentimplications Those countries that have followed import-substitutionpolicies (eg India) have suffered greater employment problems thanmore open economies Research in several countries by the InternationalFood Policy Research Institute (IFPRI) indicates that an export-orientedagriculture increases the demand for hired labor raises family incomesand benefits both landowners and landless laborers3 Small-scale farm-ers who produce sugarcane non-traditional vegetables and other cashcrops for export usually maintain some production of subsistence cropsas insurance against market and production risk but these farmers alsobenefit from the additional income from the cash crops

The Role of Trade in Agricultural DevelopmentAgriculture has many roles to play in economic development and tradecan affect the relative importance of these different roles In fact anoutward-looking trade orientation helps solidify the role of agriculturein development especially if the outward orientation is accompaniedby an agriculture- and employment-based growth strategy Removalof impediments to trade will facilitate exports and thus will enhance

3 Several studies conducted by Joachim Von Braun and others at the InternationalFood Policy Research Institute involved farm and household surveys in Guate-mala The Gambia Rwanda and elsewhere

336


BOX 16-3FACTOR ENDOWMENT THEORY of TRADE

The Factor Endowment Theory of Trade (often called the Heckscher-Ohlin-Samuelson Theory because it is derived from their work) argues thatbecause countries have different factor endowments they adopt differentproduction techniques and the result is profitable trade A country withrelatively abundant labor (compared to land and capital) will have a lowwage rate relative to land prices rents and interest on capital-borrowingSuch a country will find it optimal to adopt labor-intensive rather thancapital-intensive technologies The opposite would be true for capital-abundant countries Without trade the price ratio of labor-intensive goodsto capital-intensive goods will be lower in the labor-abundant country thanin the capital-abundant country Opening the country up to trade wouldmean that the labor-abundant country would export labor-intensive goodsin exchange for capital-intensive goods Trade will have the effect of in-creasing the demand for the abundant factor thus bidding up its price andincreasing the supply of the scarce factor (in the form of imported goods)thereby reducing its price Trade is expected to reduce factor price differ-ences between countries

This discussion is drawn from David Colman and Trevor Young Principles of

Agricultural Economics Markets and Prices in Less Developed Countries (Cam-bridge Cambridge University Press 1989) pp 232ndash34

the foreign exchange contribution of agriculture An open-trading re-gime helps provide accurate signals of relative resource scarcity to pro-ducers and to investors the abundance of labor usually found in mostdeveloping countries signals the need for employment-intensive invest-ment With no bias in favor of capital-intensive industries demandsfor capital-intensive manufacturing processes can be met through im-ports increasing the importance of agriculturersquos labor contribution

The food and fiber contribution of agriculture under an outward-looking strategy is usually of most concern to policymakers Fear ofexcessive reliance on imports to meet domestic food needs can lead toprotectionist policies But protection raises the cost of food and com-bining freer trade with more investment in domestic agricultural pro-duction usually results in faster and more stable economic growth Ofcourse if growth in demand exceeds domestic food production thenimports may be needed to fill the gap but these imports should beviewed as evidence of success in generating employment and incomegrowth Income growth will enhance food security and open trade willreduce reliance on often unstable domestic food production

337


TRADE IMPEDIMENTSThe variety of agricultural trade strategies that exists in developingcountries reflects differences in resource endowments history foodsecurity sources of government revenues balance of payments and soon This variety also indicates differences in perceptions about the abil-ity of markets to generate prices consistent with desired income distri-butions Virtually no country in the world operates with a completelyfree-trade regime Most developing countries employ trade policies thatdiscriminate against the agricultural sector as discussed in Chapter 15Domestic trade policies however are just one of the impediments toagricultural trade In this section we discuss the major constraints totrade and in Chapter 17 we suggest potential solutions to trade prob-lems Impediments to agricultural trade for developing countries canbe classified into three major categories (1) external demand constraints(2) restrictive trade policies at home and (3) market instability

External Demand ConstraintsDeveloping countries have long been concerned that as producers ofprimary products they face relatively inelastic demands in more-developed countries With inelastic demands additional exports mayresult in a fall in world prices for the commodities While individualcountries face relatively elastic export demands when several coun-tries that export the same products (eg cocoa coffee bananas etc) alltry to increase exports simultaneously prices might fall by a higherpercentage than export quantities increase Thus their collective ex-port revenues could decline even as export quantities grow An impor-tant recent example is the coffee crisis that began in the late 1990s asVietnam Indonesia and other relative newcomers to coffee produc-tion began to expand their exports World prices of coffee fell to around$50lb compared to average prices of $120lb during the 1980s Pricesduring the early 2000s were so low that an estimated 540000 workersin Central America lost their jobs as coffee farms discontinued harvest-ing4 After 2004 coffee prices partially recovered as supplies tightenedbut temporary job losses caused permanent harm to many householdsSustained declines in export prices can cause worsening terms of tradein the long run as well Historical evidence suggests that the terms of

4 See Panos Varangis Paul Siegel Daniele Giovannucci and Bryan Lewin ldquoDealingwith the Coffee Crisis in Central America Impacts and Strategiesrdquo The WorldBank Development Research Group Policy Research Working Paper 299 (March2003)

338


trade for developing countries may indeed have declined over time astheir output growth has outpaced increases in demand5

Trade Restrictions in More-Developed CountriesThe demand for certain LDC agricultural exports is affected by traderestrictions in more-developed countries (MDCs) The MDCs are moreprotectionist of their agricultural than of their industrial productsWhereas LDCs often discriminate against agriculture MDCs often sup-port farm prices above market equilibrium levels in hope of support-ing farm incomes (see Chapter 15) Thus MDCs have to restrict im-ports to avoid supporting the whole worldrsquos prices Restrictions par-ticularly affect exports from temperate and subtropical areas of LDCsthat compete with MDC agricultural products commodities such asbeef certain fruits and vegetables and sugar

Raw tropical products such as cocoa and coffee face few restric-tions because they do not compete with more-developed country pro-duction However semi-processed products such as cocoa paste andcertain fibers such as cotton do face restrictions Developing countrieswould like to export more processed commodities because those prod-ucts have a higher unit value and provide more employment

Quotas and tariffs are two of the more common import restric-tions placed on agricultural commodities by MDCs An example of howan import tariff works to increase price in the country imposing it andto reduce imports from the exporting countries is illustrated in Figure161 The tariff increases the price that domestic consumers must payfor imports which also raises the price they are willing to pay to localproducers as well In Figure 161 the country imposing the tariff is smallin the world market so the tariff does not alter the world price How-ever if is country is large in the world market such as the United Stateswith sugar a tariff (or a quota that would act just like the tariff in itseffects on the market) would depress the world price as well

It is estimated that if the more developed countries removed allbarriers to market access for agricultural products from other coun-tries the world would gain about $44 billion (in 2001 dollars) about a

5 Gross terms of trade do not take into account differences in costs of production be-tween the products However it is difficult to draw a firm conclusion about the netterms of trade because improved technologies have reduced the cost of producingthe exports as well It is possible for the gross terms of trade to decline but the netterms of trade and comparative advantage for agricultural products to improve

339


Figure 161 Effects of an import tariff

quarter of which would accrue to developing countries6 If all tariffsand subsidies were removed by more developed countries the largestindividual country winners would be Brazil Argentina and India

Subsidized agricultural prices in the more developed countriesencourage increased production in those countries while high pricesdiscourage consumption If production exceeds consumption stocksaccumulate unless they are exported at subsidized prices The addi-tional volume of exports can depress world prices making productionelsewhere even less attractive Dairy products and wheat are examplesof subsidized exports of high-income countries Urban consumers indeveloping countries can benefit from these policies at least in the shortrun due to lower prices but farmers in those countries are faced withproduction disincentives and lower incomes These price distortionsthough benefiting MDC farmers are globally inefficient They createconditions for lower growth worldwide One of the purposes of nego-tiations under the auspices of the World Trade Organization (discussedin Chapter 17) is to reduce these trade restrictions

Restrictive Trade Policies at HomeMany developing countries proclaim food self-sufficiency as an objec-tive but employ direct and indirect policies that on net tax farmerssubsidize consumers and increase dependence on food imports Ex-amples of direct policies that influence agricultural trade are export

6 Thomas Hertel and Roman Keeney ldquoWhat is at Stake the Relative Importance ofImport Barriers Export Subsidies and Domestic Supportrdquo in Kym Anderson andWill Martin eds Agricultural Trade Reform and the Doha Development Agenda (Wash-ington DC The World Bank 2005) pp 49ndash52

340


Developed countries protect rice producers at the expense ofproducers in developing countries

taxes and subsidies import tariffs export and import quotas import orexport licenses and government-controlled marketing marginsMultiple and overvalued exchange rates and high rates of industrialprotection are the principal indirect means of discriminating againstagriculture

Agricultural export taxes are one of the oldest and most commontrade interventions in developing countries Export taxes tend to raisethe prices of the products to foreign buyers and reduce the prices re-ceived by domestic producers Producers of cocoa in Ghana cotton inMali coffee in Togo tobacco in Tanzania and tea in India mdash to namejust a few products and countries mdash typically receive much less thanthe border prices for their products Some of this difference is due tomarketing system inadequacies (see Chapter 15) but a significant por-tion is caused by export taxes

Some taxation of export crops involves direct taxation of productsas they move through ports Alternatively public marketing agenciesare established that control marketing margins or set farm prices lowerthan market equilibrium These agencies often called marketing boardsor parastatal marketing agencies were discussed in Chapter 15 Theyare granted monopoly power for buying and selling the commodityand they may set quotas for exports or imports

Export taxes are prevalent in the developing countries because theyare a relatively easy tax to institute and collect compared to alternatives

341

such as income or land taxes Export taxes generate government rev-enues and in some cases reduce exports and encourage the shifting ofproduction from exports to domestic food crops

Occasionally developing countries impose export taxes in attemptsto exploit monopoly power that they believe they hold in world mar-kets If a country is a large enough exporter in the world market toaffect the world price it can use a tax to raise the world price Althoughthe volume of trade would be lower following the imposition of thetax the hope is that additional income is earned at the expense of pur-chasing countries because the price is higher Ghana has used this ra-tionale for its export tax on cocoa Brazil for a tax on coffee andBangladesh for a tax on jute Although some world price increase ispossible the ability of individual developing countries to exploit mo-nopoly power for particular commodities is quite limited Higher pricescreate incentives for increased production in other countries as well asfor the development of substitute products

Developing countries sometimes use export quotas to partially ortotally restrict exports These restrictions force the sale of the productsin domestic markets thereby reducing prices to consumers The resulthowever is to discourage domestic production and to generate profitsfor those holding the quota rights

Import tariffs and quotas are also used on agricultural products indeveloping countries and are commonly employed on industrial prod-ucts as well When an import tariff or quota is imposed on industrialgoods the prices of the goods are raised relative to those of agriculturalgoods creating an indirect tax on agriculture Another significant sourceof indirect taxation is exchange rate misalignments that result from bothmacroeconomic policies and direct industrial protection policies Whenfiscal and monetary policies (see Chapter 18) lead to a higher rate ofinflation at home than abroad the value of the local currency falls Ifgovernments fail to adjust the official exchange rate downward thecurrency becomes overvalued An overshyvalued currency makes exportsfrom a country more expensive and imports into it cheaper Thus fewergoods are exported and more imported The additional supply of agri-cultural products on the domestic market reduces farm and consumerprices Exchange rate overvaluation is common in developing coun-tries and historically has been particularly severe in several Africancountries including Nigeria Ghana and Tanzania

Countries sometimes establish a multiple exchange rate system Withthis system different commodities are traded at different rates For ex-ample the government allows one rate of exchange for a commodity itwants to keep inexpensive in the country and another for a commodity


342

it wants to make expensive Multiple exchange rate systems often dis-criminate against the agricultural sector

Accurately measuring the effect of government policies on theprices received by farmers is difficult in part because governments typi-cally implement many different policies at once The results of researchto compare actual farm level prices with what farmers would have re-ceived under free-trade policies across countries all around the worldare summarized in Table 16-2 The results in the table are averages for75 countries which together account for over 90 percent of the worldrsquospopulation total income and agricultural income Policy effects wereestimated for the major products in each country in each year totalingmore than 70 different products with an average of almost a dozen percountry Not all countries had data for the entire 1955ndash2007 period butthe average number of years covered is 41 per country

The data in Table 16-2 illustrate how governments in Africa Asiaand Latin America imposed heavy taxes on their farmers during the1960s and 1970s In the 1980s a wave of reform known as structuraladjustment led many of these governments to reduce average tax bur-dens by lifting both exchange-rate distortions and direct trade restric-tions Some of these policy changes were imposed by foreign lenders sothat borrowing countries could expand exports and repay their debtsbut many were adopted voluntarily by developing-country govern-ments seeking faster economic growth Changing domestic socioeco-nomic conditions also led to policy change particularly when higherincomes and other trends raised the relative political power of acountryrsquos farmers as opposed to its food consumers and taxpayers

This rising political influence is reflected in Table 16-2 in the switchfrom taxing farmers to subsidizing them in Asia and Latin Americaand in the particularly rapid rise in subsidy rates in the highest-incomecountries of Asia This transition towards farm subsidies is a bit of aparadox in that farmers have greater political influence and more sup-port from government after they are fewer in number and have alreadyescaped extreme poverty The situation may seem unusual but as dis-cussed earlier lobbying is facilitated by smaller numbers and richercountries can afford support easier than poor countries Factors such asbenefits and costs per person help explain why regions differ in theaverage tax or subsidy rates shown in the table7

7 Several recent papers analyze these data including William A Masters and AndresF Garcia ldquoAgricultural Price Distortion and Stabilization Stylized Facts and Hy-pothesis Testsrdquo in Political Economy of Distortions to Agricultural Incentives ed KymAnderson (Washington DC The World Bank 2009)


343


TA

BL

E 1

6-2

A

VE

RA

GE

RA

TE

S o

f G

OV

ER

NM

EN

T T

AX

AT

ION

or

SU

PP

OR

T t

o A

GR

ICU

LT

UR

E in

SE

LE

CT

ED

CO

UN

TR

IES

b

y R

EG

ION

1

95

5 T

O 2

00

7 (

pe

rce

nt

of

un

dis

tort

ed

pri

ce

s)

19

55-5

919

60-6

419

65-6

919

70-7

419

75-7

919

80-8

419

85-8

919

90-9

419

95-9

920

00-0

420

05-0

7

Afr

ica

-14

-8-1

1-1

5-1

3-8

-1-9

-6-7

-2A

sia

-27

-27

-25

-25

-24

-21

-9-2

81

25

8L

atin

Am

eric

a-1

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s

344


Policy changes that influence prices can lead to large responses infarm income and agricultural production The output responses to pricechanges for different commodities in Africa and the rest of the worldare indicated in Table 16-3 Production of individual crops whose areaplanted can vary quickly is more responsive than that of total agricul-tural output but substantial shifts have occurred among commoditiesproduced as prices changed

Heavy taxation of agriculture and trade restrictions constrain ag-ricultural growth By reducing farm incomes they hasten the exodus ofpeople from rural areas creating social costs in urban areas as sewerwater health systems and other infrastructure are stretched to theirlimits Lower incomes in agriculture also reduce farmersrsquo incentives toinvest in land improvements such as irrigation and farm buildings toadopt new technologies and to support rural schools with local re-sources

Arguments against a relatively free trade regime often are basedon anticipated effects of trade on income distribution The basic con-cern is that the benefits of trade may accrue to the wealthiest segmentsof society While there is reason for concern that a disproportionateamount of economic gains from trade might go to the wealthiest his-torical evidence suggests that a high proportion of the benefits fromtrade restrictions also accrues to them Trade restrictions provide a

TABLE 16-3 SUMMARY of OUTPUT RESPONSESto PRICE CHANGES

Percentage change in output with a 10 increase in pricea

Crop African countries Other developing countries

Wheat 31 ndash 65 10 ndash 100Maize 23 ndash 243 10 ndash 30Sorghum 10 ndash 70 10 ndash 30Groundnuts 24 ndash 162 10 ndash 30Cotton 23 ndash 67 10 ndash 162

Tobacco 48 ndash 82 05 ndash 100Cocoa 15 ndash 180 12 ndash 95Coffee 14 ndash 155 08 ndash 100Rubber 14 ndash 94 -04 ndash 40Palm Oil 20 ndash 81 ndash

aThe lower end of the range shows short-term supply responses and the upperend shows long-term responsesSource World Bank World Development Report1986 (New York Oxford University Press 1986) p 68

345


fertile environment for powerful domestic interest groups to pressurefor advantages The benefits of quota rights export and import licensesand subsidized inputs provide economic incentives for people to lobbyfor these privileges Visible corruption often emerges as well It is naiveto assume that governments are simply selfless protectors of social wel-fare They are politicians and civil servants who respond to pressuresfrom private individuals and interest groups

While many government employees act with the overall publicgood in mind they may also be just as concerned with their own self-interest as people are in the private sector Self-interest can encompassmonetary gain re-election promotion or other rewards And even whenthere are no conflicts of public and private interests administrative com-plexities associated with trade restrictions can lead to waste costly timedelays in marketing and other types of inefficiency

Market InstabilityGovernment officials in developing countries often argue that trade re-strictions are needed to counter food insecurity and income risks asso-ciated with international trade Price instability in international com-modity markets is indeed very large but prices would also fluctuatedomestically in the absence of trade

Why are agricultural prices so variable The central reason is thatdemand for most primary commodities is relatively inelastic As weatherchanges and other factors cause supply to shift back and forth againstan inelastic demand curve prices vary substantially for small changesin quantity supplied (see Figure 16-2) A shift back in food supply againstan inelastic demand at a time of low food stocks was responsible for arapid rise in world food prices during 2007ndash08 which in turn led manyfood-surplus countries to restrict exports and food-deficit countries toseek self-sufficiency When trade restrictions are imposed in such a situ-ation however prices in local markets become even more volatile thanworld prices because domestic demand tends to be even more inelasticthan world demand

One way for governments to reduce their countryrsquos vulnerabilityto fluctuations in commodity prices is to diversify by investing in awider range of agricultural products and in other sectors When thesenew enterprises are profitable the result is sustained growth and greaterstability Unfortunately some attempts at diversification impose taxeson successful industries while promoting less successful ones Such pro-motion can reduce growth and worsen instability Both diversificationand stabilization are often most successful when they are driven by newtechnologies and accompanied by marketing improvements These

346


changes can make production of major field crops more stable and canfacilitate introduction of products for which markets are growing suchas such as non-traditional fruits and vegetables Diversification may beassociated with higher levels of exports but less overall exposure tosingle market risks

SUMMARYProponents of trade restrictions argue that as countries become moreintegrated into the world economy they open themselves up for ex-ploitation by more-developed countries Trade proponents of freer tradeargue that it facilitates development and permits more efficient use ofresources It gives countries access to goods and services that otherwisewould be unavailable or more expensive Even well-motivated effortsto restrict trade however often serve merely to benefit the wealthyMost developing countries do trade and also follow some restrictivetrade policies Many developing country exports come from agricul-ture The preponderance of evidence supports the view that a relativelyopen trading environment is more conducive to economic developmentthan a highly restrictive one

Figure 16-2 Small changes in the supply of agricultural productscan result in large changes in price

347


Developing countries have a comparative advantage in severalagricultural products particularly tropical ones They often become lessself-sufficient in food in the middle stages of development Trade tendsto have favorable employment implications

External demand constraints market instability and internal di-rect and indirect trade restrictions all impede exports from and importsinto developing countries Lack of access to developed country mar-kets is probably the most severe external problem Governments im-pose internal trade restrictions to raise revenue to distribute income toparticular groups in response to pressures from interest groups to ex-ploit monopoly power for certain export crops and for reasons of foodsecurity Indirect restrictions such as overvalued exchange rates are oftengreater sources of discrimination against agriculture than are direct re-strictions such as export taxes and quotas

IMPORTANT TERMS and CONCEPTSComparative advantage MercantilismExport taxes Multiple exchange ratesForeign exchange rates Overvalued exchange rateFree Trade ProtectionismImport substitution QuotasInternational commodity agreement TariffsInternational trade Terms of trade

Looking AheadA variety of steps can be taken to enhance international trade The nextchapter considers those steps including the role of regional groupingsof countries multilateral trade negotiations and other changes in do-mestic and international policies

OUESTIONS for DISCUSSION1 Why do countries trade2 Why do some argue that the terms of trade turn against developing

countries over time3 What is comparative advantage4 Has agriculture as a percent of total earnings increased or declined

for developing countries over the past 30 to 40 years5 Why might a countryrsquos comparative advantage for particular

products change over time6 Identify the possible linkages between trade and employment7 What are the major external trade impediments facing developing

countries

348


8 Why is world price instability a problem for developing countries9 What are the major direct and indirect agricultural trade restric-

tions employed by developing countries10 Why do developing countries impose trade restrictions11 Why does as overvalued exchange rate hurt agricultural exports

from a country


Doha Development Agenda (Washington DC The World Bank 2005)Colman David and Trevor Young Principles of Agricultural Economics

Markets and Prices in Less Developed Countries (Cambridge CambridgeUniversity Press 1989) Chapter 11

Johnson D Gale World Agriculture in Disarray 2nd ed (New York StMartinrsquos Press 1991)

349

CHAPTER 17

Trade Policies Negotiationsand Agreements

hellipthe WTO at least provides a system of rules for world trade hellip

The rules may not be perfect but they are certainly better than no

rules at all mdash Eugenio Diaz-Bonilla and Sherman Robinson1

THIS CHAPTER1 Explores solutions to internal constraints to trade2 Discusses trade negotiations regional cooperation and other inter-

national solutions to trade problems3 Considers means of reducing price production and income instabil-

ity problems associated with trade

REDUCING INTERNAL BARRIERS to INTERNATIONALTRADEBarriers to expanded international trade in agricultural products areboth self-imposed by developing countries and externally-imposed onthem by protectionist policies in more developed countries We beginby considering what developing countries can do internally to solvetheir trade problems Trade restrictions are imposed within develop-ing countries in attempts to distribute benefits to particular groups togenerate government revenues and to offset economic instability andfood insecurity Removing these restrictions may require institutionalchange to facilitate reform alternative revenue sources to replace tradetaxes that help pay for public services and bridge financing to pay theadjustment costs associated with short-term losses before long-termgains arise

1 Eugenio Diaz-Bonilla and Sherman Robinson ldquoThe WTO can Help Worldrsquos PoorFarmersrdquo International Herald Tribune March 28 2001

350


Institutional Change to Facilitate ReformAs seen in the previous chapter a principal motive for trade restric-tions is to redistribute income within the restricting country transfer-ring real income to one sector at the expense of others Reforming suchpolicies requires a shift in political influence which usually comes fromchanges in social institutions Civic organizations the media legal pro-cedures and administrative practices all help determine whether a par-ticular sector mdash such as sugar refiners or steel producers mdash have thepolitical influence needed to obtain favorable trade restrictions Oftenreforms arise not because favored groups lose some of their power butbecause other groups acquire more influence of their own and use thatto obtain countervailing policies that level the playing field Helpingmore groups acquire some influence often involves lowering transac-tions costs and facilitating access to information among those who arerelatively powerless Doing so can help those individuals engage incollective action (especially informal lobbying and protesting) andthereby pressure the government for more favorable policies

A concerted and sustained effort is often needed to reform poli-cies that benefit powerful groups Transparency and accountability ingovernment facilitated by a free media and an independent judiciaryare often essential to constrain unscrupulous behavior Policy prescrip-tions mentioned in earlier chapters with respect to land tenure envi-ronmental policy price policy and research policy are also relevant fortrade policy

One external means of encouraging internal policy reforms is foran organization such as the World Trade Organization (WTO) to helpcountries enter mutual commitments to favorable policies and for lend-ers such as the International Monetary Fund (IMF) to require trade re-forms as conditions for loans This type of activity is viewed by manyas meddling in the internal affairs of developing countries And to acertain extent it is It certainly places a high burden on an institutionsuch as the WTO or IMF to get its interventions right lest it cause moreharm than good Often however international actors can help a gov-ernment to undertake reforms that are known to be desirable but maynot be politically feasible for them to accomplish without an externalpartner

Alternative Revenue SourcesExport taxes and import tariffs are among the easiest mechanisms forraising government revenues in developing countries They can be re-placed with less-distorting revenue sources such as income taxes prop-erty taxes and value-added taxes but this kind of fiscal reform requires

351


a large increase in record-keeping and accounting information aboutthe domestic transactions to be taxed Converting quantitative restric-tions (quotas) to export taxes or import tariffs as an intermediate stepto their removal while not removing the distortion would at least pro-vide more revenues to the government rather than to private individuals

Foreign debt reduction would reduce the pressure on developingcountry governments to generate revenues The nature of debt prob-lems in these countries and potential solutions are discussed in Chap-ter 18 Most of these solutions require action on the part of both more-and less-developed countries Several developing countries have andwill continue to realign their exchange rates to encourage more exportsBut this solution will be insufficient for most countries without addi-tional assistance from more developed countries

Bridge Financing for Adjustment CostsDeveloping countries often find it difficult to undertake necessary long-term policy reform because the short-term consequences are so severeDevaluation of an overvalued exchange rate raises the cost of importsand reduces the cost of exports While these cost changes improve theforeign-exchange balance and may improve economic efficiency theyalso mean that fewer goods are in the domestic market and that theremay be severe price increases in the short run Food prices may risereal incomes fall and a disproportionate burden may be placed on thepoorest members of society

International organizations can play a role in providing financialassistance to help offset short-term cost-of-adjustment problems associ-ated with policies or structural adjustment programs In fact multilat-eral donors led by the World Bank instituted social funds as a meansof providing some protection to the poor during structural adjustmentprograms2 Since the losers from policy reform can block changes thatwould help many more people in the long run assistance aimed at fa-cilitating adjustment can have significant benefits over time

REMOVING EXTERNAL CONSTRAINTS to INTERNATIONALTRADEThe primary methods that have been suggested as potential solu-tions to external trade constraints include trade negotiations andspecial preferences regional cooperation and product diversification

2 See Carol Graham Safety Nets Politics and the Poor (Washington DC The BrookingsInstitution 1994)

352


Countervailing trade restrictions to offset the external constraints alsohave been suggested but they can generate their own set of problems

Trade Negotiations and Special PreferencesBilateral and multilateral negotiations have provided opportunities forliberalizing external restrictions on developing country trade Bilateralnegotiations occur when one country negotiates preferential trade ar-rangements with a second country either for specific goods or for wholecategories of goods and services For example nation A might grantnation B preferential access to its sugar market mdash that is reduce orremove restrictions to sugar imports from nation B mdash in exchange forspecial access to nation Brsquos wheat market Or nation A a more-developed country might simply grant a special preference to nationB a less-developed country Numerous variations of bilateral trade ne-gotiations and special preferences are found

Since World War II the primary focus for trade negotiations hasbeen multilateral rather than bilateral under the auspices of the Gen-eral Agreement on Tariffs and Trade (GATT) and since 1994 the WorldTrade Organization (WTO) The GATT signed in 1947 replaced a se-ries of bilateral agreements that segmented world trade before the warMore than 100 countries were signatories to the GATT and currentlyabout 150 countries are members of the WTO its successor organiza-tion The GATT and WTO have attempted to foster adherence to theprinciple that countries should not discriminate in the application oftariffs3 Nondiscrimination implies that bilateral preferential agreementsare not allowed The rules allow for exceptions for developing coun-tries Several developed countries maintain preferential trading arrange-ments with particular groups of developing countries for certain cat-egories of products For example the United States instituted a Carib-bean Basin Initiative that eliminated tariffs and quantitative restrictionsfor many agricultural products from Caribbean countries Several coun-tries in West Africa have had special preferences with France Somedeveloping countries have called for more generalized preferences tobe granted to countries with incomes below a particular level

The GATT contained provisions related to consultation and nego-tiation to avoid disputes rules concerning non-tariff as well as tariffbarriers and agreements to periodic multilateral negotiations to lowertrade barriers Over time success in reducing tariff barriers increased

3 Nondiscrimination has been called the most-favored national principle that a coun-try should apply to other countries the same tariff levels that it applies to its most-favored nations

353


the importance of non-tariff barriers Non-tariff influences on trade in-clude but are not limited to certain types of health and safety regula-tions (see Box 17-1) domestic content restrictions complex customsformalities and reporting requirements and rules on intellectual prop-erties

Eight rounds of multilateral trade negotiations took place underthe GATT Most of the early rounds involved negotiations on tariffsand on rules for trading blocs such as the European Community (EC)The middle rounds increasingly focused on non-tariff issues Agricul-tural trade restrictions received relatively little attention until the Uru-guay Round from 1986 to 19944 They are at the heart of the Doha Roundnegotiations under the WTO also called the Development Round

Developing countries have felt that trade negotiations have focusedtoo little on developed country trade restrictions that affect developingcountries Since 1964 they have met periodically under the auspices ofthe United Nations Conference on Trade and Development (UNCTAD)a permanent organization within the United Nations to develop pro-posals for trade arrangements more favorable to developing countriesThese discussions led to calls for a new international economic order(NIEO) The NIEO contains provisions for improved access to

4 Tariff rounds are frequently named after individuals or after locations where theinitial discussions in the in the round take place The Uruguay Round began with ameeting in Punta del Este Uruguay in 1986

BOX 17-1ENVIRONMENTAL HEALTH and SAFETY REGULATIONS

Environmental or health and safety regulations can have a significant ef-fect on trade The United States prohibits the importation of products thathave certain pesticide residues Fresh or frozen beef is prohibited fromcountries that have a history of foot-and-mouth disease Clearly govern-ments are wise to regulate trade in products potentially injurious to publichealth More-developed countries usually have tighter environmental andfood-safety regulations than less-developed countries These regulationsraise the cost of production so that without corresponding restrictions ontrade not only might there be environmental or health threats but devel-oped country producers might be placed at a competitive disadvantageHowever environmental or health and safety restrictions appear some-times to be used arbitrarily to protect the economic health of an industrywhen the true human health hazard is seriously in doubt As a result re-cent multilateral trade negotiations have included tighter rules on whensuch restrictions can be applied

354


developed country markets through a generalized system of trade pref-erences and for a set of mechanisms aimed at reducing price and for-eign exchange earnings instability

Aside from some compensatory financing schemes for stabilizingforeign exchange (discussed below) some specific trade preferencesand a few other measures UNCTAD proposals for a NIEO went largelyunheeded The Uruguay Round of the GATT produced the first seriousattempt to address agricultural trade restrictions including some ofparticular concern to developing countries The reason for finally con-sidering agricultural restrictions had little to do with agricultural de-velopment problems per se By the mid-l980s budget costs shrinkingforeign demand and world surpluses that threatened a global tradewar forced agricultural issues to the top of the GATT agenda The Uru-guay Round negotiations highlighted the divisions among more-de-veloped countries and between more-developed and less-developedcountries with respect to trade policy and also illustrated the diversityof interests among less developed countries Net-exporting developingcountries were very concerned about market access and effects of de-veloped country export subsidies Net-importing developing countrieswhile concerned about market access were also concerned about pos-sible rising prices in world markets particularly for food grains

The Uruguay Round ended with a very modest reduction in tradebarriers but success in reorienting the trade debate in several respectsPrior to the Uruguay round trade in many agricultural products wasunaffected by the tariff cuts that had been made for industrial productsin previous rounds In the Uruguay Round there was agreement toconvert all non-tariff agricultural trade barriers to tariffs These tariffswere subject to bindings that limit countriesrsquo ability to increase themThe round also contributed to a shift in domestic support for agricul-ture away from those policies with the largest potential to affect pro-duction and therefore to affect trade flows Countries accepted com-mitments to reduce expenditures on export subsidies and not to applynew subsidies to unsubsidized commodities Because the base periodschosen had generally high protection the way non-tariff barriers wereconverted to tariffs and the modest percentage reductions agreed tothe overall reduction in trade barriers was small5 However the basewas established to build on in future negotiations

5 Developed countries committed to reducing tariffs by 36 from the levels in the late1980s developing countries 15 The Uruguay Round allowed countries to insti-tute ldquotariff-rate quotasrdquo A tariff-rate quota applies a lower tariff to imports belowa certain quantitative limit (quota) and permits a higher tariff on imported goods

355


The Uruguay Round resulted in separate agreements on (a) sani-tary and phyto-sanitary (SPS) measures to protect humans animalsand plants from foreign pests diseases and contaminants and (b) in-tellectual property rights to protect patents copyrights and other suchrights from infringement abroad Both of these measures have been dif-ficult for developing countries to accept The SPS rules can be creditedwith increasing transparency of countriesrsquo SPS regulations and provid-ing a means for settling disputes Still the rules can be manipulated tosome extent to create barriers to trade that may not be related to SPSconcerns The rules state that science should be the deciding factor as towhether an imported good poses a threat but science can still be de-bated Intellectual property rights are monopoly rights that are grantedto create incentives for private individuals and firms to innovate How-ever they also can lead to companies charging high prices to poor coun-tries for drugs and production inputs

World Trade OrganizationThe WTO was created in 1994 to replace the GATT and strengthen theenforcement of international trade rules and the settling of trade dis-putes For example a single country can no longer block the formationof a dispute resolution panel or veto an adverse ruling by blocking theadoption of a panel report However it can still be difficult to get coun-tries whose practices have been successfully ruled against to changetheir behavior because the only sanction which the WTO can imposewhen a member government is found to have violated its WTO com-mitments is to give to other governments the permission to impose lim-ited specific retaliatory sanctions

The WTO matters mainly as a framework for negotiation Despiteconcerns of developing countries that the WTO is dominated by moredeveloped countries the WTO does give developing countries moresay than they would have outside it It is also more open than the GATTPartly for this reason more developing countries have joined the WTOthan were members of the GATT Because developing countries canvote as a bloc or blocs they can force issues more strongly than beforeFuture negotiations under the WTO are likely to succeed only with someconcessions to developing country concerns In the 2001 meeting inDoha Qatar developed countries agreed to place export subsidies

after the quota has been reached The purpose was to ensure that historical tradelevels could be maintained while creating some new trade opportunities How-ever the effect has been to slow the rate of trade liberalization

Footnote 5 continued

356


higher on the agenda They also agreed to some relief on intellectualproperties such as for drugs to fight AIDS The Doha Round has beencalled the Development Round to indicate international commitmentto addressing concerns of developing countries In the 2003 Ministeriallevel WTO meeting in Cancun Mexico a group of 21 developing coun-tries (which altogether represented about two-thirds of all the worldrsquosfarmers) called for tighter domestic support restrictions for developedcountries and more flexibility for special and differential treatment fordeveloping countries Their strong position was one of the reasons lead-ing to a breakdown of that meeting but it marked a negotiating mile-stone in that for the first time several developing countries negotiatedas a block and were able to affect the outcome

The WTO faces significant obstacles in its role as an internationalforum for trade negotiations Some poor countries fear that developedcountries will use labor standards as a protectionist tool Others areconcerned that little progress will be made to strengthen anti-dumpingrules and to continue to remove protectionist policies on textiles andapparel The Europeans want stronger environmental rules than eitherthe United States or developing countries would like the latter prefer-ring environmental issues to come under separate non-trade agree-ments

Most would argue that the WTO is at least potentially more a friendthan a foe for developing countries It has been estimated that globalfree trade would confer income gains of about $150-200 billion annu-ally to developing countries and reduce the number of extremely poorpeople6 About half of those gains would arise from removing restric-tions (eg tariffs and quotas) on exports from developing-country prod-ucts to developed-country markets especially in agricultural goodstextiles and apparel The gains would be roughly twice the amountthat developing countries currently receive through foreign develop-ment assistance However in the Doha Round negotiations neither de-veloped nor developing countries have sought the degree of trade lib-eralization that would come close to generating this level of benefitsAlmost half of what developing countries could gain from free tradewould come from their own tariff reductions because about a third oftheir exports are to other developing countries and because their tariffsare higher than those of the developed countries7 In July 2008 Doha

6 William Cline Trade Policy and Global Poverty Institute for International Econom-ics Washington DC 2004

7 Kym Anderson and Will Martin eds Agricultural Trade Reform and the Doha Develop-ment Agenda (Washington DC The World Bank 2005) p12

357


Round negotiations broke down over agricultural trade issues espe-cially a dispute over a mechanism that would allow poor countries toinstitute tariff protection for specific products if prices drop too low orthere is a surge in imports As of mid-2009 formal negotiations are stillat an impasse Global recession has hindered the restart of talks as mostcountries find it politically difficult to discuss reducing trade barriersduring economic downturns The future of the Doha Round remainscloudy at this time

Regional Trade AgreementsInternational trading relations are increasingly influenced by regionalorganizations and trading blocs The economic union in Europe andthe North American Free Trade Area (NAFTA) are examples but sotoo are the more loosely integrated free-trade areas that have been es-tablished in the Asian-Pacific countries the Andean countries and theSouthern cone countries in Latin America in Southern Africa and else-where Free trade areas are trading blocs whose member nations agreeto lower or eliminate tariffs and perhaps other trade barriers amongthemselves but each country maintains its own independent tradepolicy toward nonmember nations Free movement of production fac-tors such as labor are usually not included8

One of the recommendations in the NIEO proposed by UNCTADwas for increased collective self-reliance among developing countriesReduced trade restrictions among a group of those countries could al-low for increased specialization economies of scale (particularly formanufacturers) and competition that reduces costs of production andimproves economic efficiency Occasionally a group of countries cangain some market power through closer economic integration How-ever exercise of that power usually creates incentives for one membercountry to undercut another in terms of production or prices The poweris then eroded and the cohesion of the group jeopardized

Regional economic groupings can be helpful to developing coun-tries but their usefulness is limited somewhat by the fact that gainsfrom trade among themselves often are constrained by the similarity ofproducts produced among different countries in a region For this rea-son there has been interest in developing countries to link to more

8 Free movement of factors is allowed in a tighter form of economic integration such asa Common Market or an Economic Federation or Economic Union One type ofregional economic integration that is tighter than a free trade area but looser than aCommon Market is a ldquoCustoms Unionrdquo in which member countries agree to a com-mon trade policy against all outside countries

358


developed countries in these groupings NAFTA is a good examplewith Mexico linked to the United States and Canada Trade liberaliza-tion under NAFTA has been accompanied by substantially larger vol-umes of trade of agricultural commodities among the three countriesNAFTA eliminated many tariffs and quantitative restrictions amongthe participants beginning in 1994 and provides for progressive elimi-nation of tariffs and other trade barriers between the countries over a15-year period Both exports and imports are up in each of the threecountries more than would have been otherwise The result has beengains from trade as well as resource adjustments within individual com-modity sectors Despite these gains extending NAFTA to include firstCentral America and the Caribbean and then all of South America hasbeen controversial Developing and more-developed countries fear forloss of jobs and there is little question that expanded regional tradewould force many adjustment costs Some also fear that the signing ofregional trade agreements will lessen incentives for countries to enterinto meaningful multilateral negotiations at the global level

REDUCING INSTABILITYMany trade policy debates focus on price variability rather than aver-age price levels for traded goods and foreign exchange earnings Someof the main strategies advocated to deal with price risk include diver-sification commodity agreements compensatory financing and en-hanced use of market information

Product DiversificationMany countries that receive a high proportion of their export earningsfrom one or two commodities could likely moderate the effects of ex-ternal trade restrictions by some diversification of exports The termsof trade can turn against any single product as substitutes are devel-oped (eg for jute and sisal) or new technologies shift supply out againsta relatively inelastic and slowly shifting world demand (eg peanuts)Also even if progress is made through negotiations in opening up mar-ket access for commodities such as sugar or cotton or reducing explicitor implicit export subsidies for commodities such as peanuts total re-moval of developed-country policy distortions is unlikely Diversify-ing the production of export and food crops can help not only to reducethe terms-of-trade problems arising from external constraints but mayreduce risks associated with price production and foreign exchangevariability

The difficulty for developing countries is in deciding how muchto diversify away from a commodity for which it has a strong

359


comparative advantage Diversification out of agriculture is a natu-ral consequence of economic development that may eventually increaseexchange-earnings stability but too much diversification within agri-culture can be a costly means of achieving stability

Commodity Agreements and Buffer StocksHistorically a widely-discussed approach to reducing price variabilityfor individual commodities has been to develop international commod-ity agreements Several of these agreements have been concluded overthe past 30 years for commodities such as wheat sugar coffee andcocoa However few of these agreements have been effective for verylong

Some early international commodity agreements like one for wheatthat operated from the late 1940s through the 1960s attempt to restrictvariation in price without influencing the price level Other agreementssuch as those for coffee and sugar have attempted not only to stabilizeprices but also to keep prices high by restricting production throughtrade quotas However when production varies these quotas can actu-ally serve to destabilize world prices A third type of commodity agree-ment involves buffer stocks With a buffer-stock scheme when suppliesare high the commodity is bought up and stored These buffer stocksare intended to provide protection against a time when supply of thecommodity drops for some reason If there is a shortage stocks wouldbe released on the market to keep prices down The agreement might

An international agreement was in effect for coffee several years ago

360


specify a minimum and a maximum price a buffer stock of say 15 per-cent of world production a tax on imports or exports to build up thestocks and perhaps some quotas for producing countries

With most commodity agreements exporters and importers havedifficulty agreeing on an appropriate target price range The agreementsalso have proven expensive to administer especially buffer-stock pro-grams with their high costs of storage

Compensatory Financing SchemesSchemes aimed at stabilizing expenditures or earnings are an increas-ingly popular alternative to direct intervention in commodity marketsThe simplest approach has been compensatory financing schemes (CFS)as illustrated in Figure 17-1 A reference line is set for each country forits total export earnings or earnings from particular commodities Up-per and lower acceptable bounds are set around the reference line Whenearnings go below the lower bound the CFS fills in the shortfall byproviding cash or credit to the particular country When earnings are inexcess of the upper bound developing countries may pay back whatwas previously taken out If the repayments shown by shaded regionsabove the top line exactly equal the borrowing shown by shaded re-gions below the bottom line plus interest then the CFS would exactlybreak even over time Of course it is nearly impossible to set referencelines at these break-even levels Commodity price trends are unpre-dictable and participating governments have a strong incentive to lobbyfor a more favorable choice of reference lines

Figure 171 Example of a compensatory finance scheme

361


Although CFS programs rarely break even they have been widelyused by donor agencies to help developing countries For example oneCFS operated by the Compensatory Financing Facility (CFF) of the IMFwas established in 1963 to provide financial assistance to member coun-tries experiencing temporary export shortfalls To use the CFF the IMFmust be convinced that the country will seek means to correct its bal-ance of payments problem in the case that export earnings shortfallsare caused by structural problems Countries also can borrow againstthe CFF when adverse weather and other circumstances beyond theircontrol result in high cereal import costs This component of the CFFcalled the cereal import facility was set up in 1981 but has been rela-tively little used

A second important compensatory finance scheme was theSTABEX run by the European Community (EC) as part of the LomeacuteConvention9 The STABEX scheme was restricted to African Caribbeanand Pacific countries and was aimed at stabilizing export earnings for48 agricultural products Usually only exports to the EC were coveredA reference line was set for each commodity based on the average valueof exports for the products in the preceding four years To qualify forcompensation export earnings had to fall at least 65 percent below thereference line All loans were interest free and the least-developed coun-tries repaid nothing The major commodities supported were cottonsisal coffee cocoa and peanuts Major beneficiaries were SenegalSudan Cote drsquoIvoire Mauritania and Tanzania

Enhanced Use of Market Information Insurance andDerivativesThe difficulty of implementing any of the stabilization approaches dis-cussed above has led to the development of new more market-basedinterventions At the simplest level governments seek to increase theflow of market information to facilitate commodity trading and stor-age Governments can also help traders use well-regulated futures andoptions markets These contracts are called derivatives because theyrepresent the right to buy or sell something else they are derived fromthe commodity but are not the product itself Important derivative

9 The ECrsquos economic arrangement with African Caribbean and Pacific countries whichreplaced former colonial preference schemes was originally spelled out in the LomeacuteConvention of 1975 and revised several times before being itself replaced by theCotonou Agreement of 2000 Other arrangements include free access for many Af-rican Caribbean and Pacific products to EC markets and the European Develop-ment Fund which administers foreign aid to these countries

362

markets exist in London New York Sydney and elsewhere the largestfutures market lsquolsquoexchangerdquo is in Chicago With futures markets com-modities can be bought and sold for delivery at a future date Farmersor exporters can fix a price for goods to be sold later thus reducing therisk This activity is called hedging Alternatively sellers can insureagainst extremely low prices and buyers against extremely high pricesby trading in options on futures contracts Farmers or exporters caninsure against low prices by purchasing an option to sell if prices fall toa specified level If prices fall below that level they can exercise theiroption to sell at that price If prices rise above it they lose what waspaid for the option but they can sell the products for the higher price

The usefulness of international futures and options markets is lim-ited for developing countries because internal commodity prices maynot follow the same pattern as commodity prices in Chicago New Yorketc However if trade becomes more liberalized in the future thesemarkets may become more useful

SUMMARYExternal demand constraints market instability and internal direct andindirect trade restrictions all impede exports from and imports into de-veloping countries Lack of access to developed-country markets is prob-ably the most severe external problem Governments impose internaltrade restrictions to raise revenue to distribute income to particulargroups in response to pressures from interest groups to exploit mo-nopoly power for certain export crops and for reasons of food securityIndirect restrictions such as overvalued exchange rates are often moresignificant sources of discrimination against agriculture than are directrestrictions such as export taxes and quotas

Trade negotiations were undertaken under the GATT beginningin 1947 but only recently addressed in any substantial way the restric-tions on agrishycultural products that are so important to developing coun-tries The WTO was formed during the Uruguay Round of negotiationsto replace the GATT and currently has roughly 150 countries as mem-bers Developing countries have more say in the WTO then they hadunder GATT Regional economic groupings of countries such as NAFTAhave also become more prevalent and have increased regional tradealthough their effects on total trade are less certain International com-modity agreements compensatory financing product diversificationand enhanced use of market information may help developing coun-tries deal with economic instability


363


IMPORTANT TERMS and CONCEPTSCompensatory finance Product diversificationDoha Round ProtectionismFree trade area QuotasGATT TariffsInternational commodity agreement Terms of tradeInternational trade Trade preferencesMulti-lateral trade negotiations Uruguay RoundNAFTA World Trade Organization (WTO)

LOOKING AHEADThe macroeconomic environment strongly influences agricultural pro-duction incentives agricultural trade and employment Domestic mac-roeconomic policies affect key prices in the economy including exchangerates interest rates wages food prices and land prices Governmentrevenues taxation borrowing and inflation all influence agricultureIn the next chapter we will consider the effects of both domestic macro-economic policies and the world macroeconomic relationships Particu-lar attention is devoted to world capital markets and the debt crisisfacing many developing countries today

OUESTIONS for DISCUSSION1 Why do developing countries impose trade restrictions2 What is the GATT and why have developing countries felt that it

has focused too little on their problems3 What is the WTO and why was it created4 What is the difference between multi-lateral and bi-lateral trade

negotiations5 What are components of the new international economic order

(NIEO) called for by developing countries under UNCTAD6 What is the purpose of a compensatory finance scheme and how

might one work7 Why might product diversification be helpful to developing coun-

tries8 What is a free trade area Give an example9 How do buffer stocks relate in international commodity agree-

ments10 How might enhanced information help reduce internal trade

restrictions in LDCs11 Why does as overvalued exchange rate hurt agricultural exports

from a country

364



Doha Development Agenda (Washington DC The World Bank 2005)Cline William Trade Policy and Global Poverty (Washington DC Institute

for International Economics 2004)

365

CHAPTER 18

Macroeconomic Policies andAgricultural Development

In the long run macroeconomic forces are too pervasive and toopowerful for micro-sectoral strategies to overcome When they workat cross-purposes as they do in many developing countries anunfavorable macroeconomic environment will ultimately erode eventhe best plans for consumption production or marketing


THIS CHAPTER1 Discusses the importance of government policies associated with

taxation spending borrowing interest rates wage rates the moneysupply and exchange rates in influencing the performance of theagricultural sector

2 Examines why governments in less-developed countries tend topursue specific types of macroeconomic policies

3 Describes the significance of the inter-relationships among macro-economic policies across countries international capital labor andproduct markets and domestic agricultural markets

MACROECONOMIC POLICIES and AGRICULTUREMacroeconomic policies have a strong influence on output prices fac-tor prices marketing margins and hence on incentives for agricul-tural producers consumers and marketing agents Foreign exchangerates for example affect export and import prices and quantities andthus output and input prices Interest rates determine the cost of in-vestments in machinery and equipment and when combined with wage

1 C Peter Timmer Walter P Falcon and Scott R Pearson Food Policy Analysis (Balti-more Johns Hopkins University Press 1983) p 215 This chapter updates ideas inFood Policy Analysis especially in the first section

366


rates the capital intensity of production Interest rates also influencethe cost of storage

The macroeconomic environment conditions the rate and struc-ture of agricultural and urban-industrial growth Job creation and in-come growth and distribution are as much a function of macroeconomicpolicies as are policies and projects targeted at specific sectors The short-run effects of macro policies on employment and income distributioncan be quite different from their long-term effects Real incomes of ur-ban consumers can be sharply reduced in the wake of macroeconomicpolicy adjustments aimed at reducing public debt or controlling infla-tion Policymakers often seek means of softening short-run income andnutritional consequences of policy changes needed for long-termgrowth

Understanding the effects of macroeconomic variables on food andagriculture is important for designing economically and politically vi-able short-and long-run policies When macro policies create distor-tions such as overshyvalued exchange rates heavily subsidized interestrates and inflationary fiscal and monetary policies agriculture is usu-ally discriminated against and long-term prospects for developmentare compromised Pressures build for major macro-policy reforms thateven if unintentionally usually help the rural sector by increasing farmincomes and rural employment Price increases and lower subsidieshowever necessitate painful adjustments by urban consumers Thepervasive nature of these macro-policy effects makes it imperative forthose interested in agricultural development to understand how themacro-economy works

Describing a Macro-economyThe ldquomacro-economyrdquo is the aggregate of all economic activity in thecountry It is the sum of all individual goods and services at the pre-vailing ldquomacro pricesrdquo for foreign currency capital and labor that cutacross all sectors The value of the activity at current exchange ratesinterest rates and wage rates can be added up in terms of demandsupply or income (see Figure 18-1) A countryrsquos gross domestic prod-uct (GDP) a measure of its domestically produced national incomewill in theory be identical regardless of whether it is calculated bysumming demands supplies or incomes In practice differences in mea-surement errors lead to different measures of income depending onthe adding-up technique used Macroeconomic policies in developedcountries often focus on managing the demand side of the economyGovernments implement policies to stimulate private consumption orinvestment use public expenditures to create demand and closely

367


manage trade Policies in developing countries frequently are more con-cerned with managing aggregate supply Governments in developingcountries tend to use the types of policies described in Chapter 15 tomanage agricultural supply similar policies affect the other produc-tive sectors Numerous developing countries have attempted to stimu-late supply by involving the government directly in the production ofgoods and services

Demand equals supply when the components in Figure 18-1 areexpressed in real terms (inflation is netted out) The basic factors ofproduction (land labor and capital) together with management earnincomes when they produce goods and services These incomes are spenton the components of aggregate demand hence total income equalsGDP Developing countries are often very concerned about the distri-bution of total income among wages interest rents and profits andundertake policies to manage this distribution

The prices of goods and services are generally expressed in thecountryrsquos currency units The monetary value of a good or service canchange due to inflation even when its real value has not changed Poli-cies that create inflation can change real values as well though oftenindirectly The causes of inflation are discussed below but many ofinflationrsquos effects are in a sense unintended results of fiscal and mon-etary policies We turn our attention to these policies first highlightingtheir effects on agriculture Then we consider the effects of macro-pricepolicies particularly those policies related to exchange rates interestrates and wage rates Finally we consider the effects of macro policies

Demand Description Supply Description Income Description

Consumption Agricultural production Wages+ + +

Private investment Industrial production Interest+ + +

Government expenditures Production of services Rents+ + +

Excess of exports over imports Government production Profitsi i i

Gross domestic product Gross domestic product Gross domestic product+

Net income transfers abroadi

Gross National Product (GNP)

Figure 18-1 Three descriptions of a macro-economy

368


on rural-urban terms of trade and land prices The major macroeco-nomic and agricultural policy connections are summarized in Figure18-2 these connections are described below

Fiscal and Monetary PolicyFiscal policy is the use of taxes and spending by government to influ-ence employment income growth and distribution and other objec-tives Monetary policy is the use of the money supply and the interestrate to influence these things The two kinds of policy are closely re-lated In particular since the government can print money and nevergoes bankrupt expanding the money supply or borrowing from for-eigners can be tempting alternatives to raising taxes Governments dif-fer substantially in their ability and willingness to run budget deficitsand in the way these deficits are financed

Governments in developing countries often go into debt becauseof their many pressing needs and limited tax revenues Tax collectionparticularly income tax collection is difficult and costly and taxes areeasy to evade in countries with poor information systems Consequently

Figure 18-2 Major connections between macroeconomic policy and foodpolicy (Source Based on Fig 5-1 in C Peter Timmer Walter P Falcon andScott R Pearson Food Policy Analysis (Baltimore Johns Hopkins UniversityPress 1983) p 223)

369


developing countries raise large proportions of their tax revenues fromexport taxes import tariffs and sales taxes as these taxes tend to beeasier to collect than others

Because agriculture is usually the largest sector in the economy indeveloping countries it generally provides more revenue to the gov-ernment than it receives in return in the form of government programsHowever there are usually substantial budget allocations to the agri-cultural sector Programs for producers include items such as irrigationsystems roads agricultural research and extension market informa-tion and certain output or input subsidies Programs for consumersinclude items such as targeted and non-targeted food price subsidiesMany of the investments in agricultural research and extension irriga-tion roads etc also benefit consumers

Foreign aid can ease some of these revenue needs as discussedChapter 19 A few countries have petroleum and other mineral resourcesthat they can export so that foreign consumers help provide revenuesfor government spending However given the limitations to raisingtaxes obtaining foreign aid or exporting petroleum or minerals mostdeveloping countries incur budget deficits They meet these deficits byborrowing often from abroad or by increasing the money supply (thatis by printing more money)

Currently several developing countries are heavily burdened bydebts incurred through previous borrowing abroad This debt prob-lem its causes effects and potential solutions to it are discussed laterin the chapter The debt incurred in previous borrowing constrains theability of many countries to take on additional debt Consequentlydomestic money supply and budget finance policies become that muchmore important The size of the money supply must match the needsfor operating capital in the productive sectors of the economy How-ever when a country prints money to finance a large budget deficitinflation is the usual result (see Box 18-1)

Inflation can be linked to increases in particular prices for exampleif a country devalues its exchange rate so the prices of all traded goodsrise or it keeps a fixed exchange rate and sees foreign prices rise But insuch cases the rising prices of those items translate into economy-wideinflation only if the whole money supply rises accordingly Otherwisethe prices of other things would fall and only relative prices wouldchange

Whatever its source inflation does not usually imply a change inall prices by the same amount and so it creates some winners and somelosers Indeed it often hurts agriculture because the prices of inputsusually rise by more than the prices of farm outputs When inflation

370


occurs the foreign exchange rate should change to reflect the reducedvalue of the currency Many developing countries do not allow thisadjustment to take place completely The resulting overvalued exchangerate increases the price of agricultural exports (thus reducing exportdemand) and makes food imports cheaper The resulting increased sup-ply of agricultural products on the domestic market reduces farm prod-uct prices The foreign exchange rate policy is just one of the macro-price policies that have significant impacts on agriculture

Macro Prices and AgricultureGovernments use macroeconomic policies to influence inflation pro-vide incentives and distribute income Three prices mdash foreign exchangerates interest rates and wage rates mdash have major effects on the macro-economy and can be manipulated by the government These macro-prices

BOX 18-1EFFECT on INFLATION of a GOVERNMENT BUDGET DEFICIT

FINANCED by EXPANDING the MONEY SUPPLYInflation is a sustained rise in the general price level for a countryrsquos goodsand services It is usually measured by a price index The following ex-ample illustrates why expansion of the money supply to finance govern-ment budget deficits creates inflation The aggregate supply of goods andservices produced must equal the aggregate demand from total expendi-tures or Y = P x Q = C + I + G + X ndash M where

Y = monetary value of national output or incomeP = price index for all goods and services producedQ = quantity index for all goods and services producedC = national consumption expenditures in private sectorI = national investment expenditures in private sectorG = government expenditures on consumption and investmentX = total value of exportsM = total value of imports

If government demand for goods and services (G) increases becausethe government prints money to pay for a budget deficit either the quantityproduced of goods and services (Q) must increase imports (M) must in-crease or prices (P) will rise Most developing countries do not have enoughidle resources to meet this demand with enough Q Changes in importsrequire foreign exchange Thus the usual result is an increase in prices

Source C Peter Timmer Walter P Falcon and Scott R Pearson Food Policy

Analysis (Baltimore Johns Hopkins University Press 1983) pp 227ndash28

371


are all in fact determined by supply and demand conditions in theirrespective markets so that if the government decides to set them byfiat conditions of excess supply or demand can result Two of theseprices interest rates and wage rates signal the scarcity of basic factorsof production capital and labor Governments often are tempted to setwage rates artificially high to directly raise incomes of workers Theyare tempted to set interest rates low to encourage borrowing and in-vestment Wages set above the free market equilibrium value deter-mined by supply and demand conditions will lead to excess supply oflabor and hence unemployment Interest rates set below equilibriumvalues will create excess demand for credit which will then have to berationed Government policy can be used to affect those macro pricesindirectly by intervening to change the underlying supply andor de-mand conditions Public works projects for example stimulate demandfor labor and could be used to raise wages

The foreign exchange rate is relatively easy to control and gov-ernments often do control it Two other prices with major effects on themacro-economy food prices and land prices are influenced indirectlythrough exchange rate manipulations These prices can also be affecteddirectly by imposing tariffs or by government interventions in theirrespective markets

Exchange Rates An exchange rate is the number of units of onecurrency that it takes to buy a unit of another currency or the price ofone currency in terms of another For many relatively developed coun-tries the foreign exchange rate is determined in international moneymarkets by the supply of and demand for a countryrsquos currency Forexample there is a demand for US dollars in Japan in order to pay foragricultural products imported from the United States Similarly thereis a supply of dollars in Japan coming from the purchase of Japanesecars by US consumers The balance of payments of any country sum-marizes all economic transactions between it and the rest of the worldThe current account largely reflecting trade balances in goods and ser-vices is balanced by the capital account which reflects changes in own-ership of assets between countries A country with a trade deficit (ie itcurrently imports more than it exports) by the nature of the accountingrelationship must run a capital account surplus (ie it is selling moreof its assets) to foreign investors Thus the supply of and demand fordollars are affected by international trade and capital flows for invest-ment or other purposes

These same supply and demand factors exist in developing coun-tries but the exchange rates in these countries frequently are set bygovernments rather than determined in currency markets A developing

372


country may fix or ldquopegrdquo the value of its currency to that of a majortrading partner such as the United States For example Honduras formany years fixed its currency the Lempira to the dollar at a rate of 2Lempira equals 1 dollar The Lempira then followed the fate of the dol-lar in foreign exchange markets It declined in value when the dollardeclined against third countries and rose when the dollar rose

A government can set a new official exchange rate to raise or lowerthe value of its currency For example Honduras eventually devaluedits currency relative to the dollar and set it at a ratio of 4 to 1 Thisdevaluation made imports into Honduras more expensive and its ex-ports cheaper In recent years countries as diverse as Thailand Indo-nesia South Korea Russia Brazil Argentina and Turkey have usedpegged exchange rates at least for a period of time In some cases suchas Ecuador the country has even done away with its currency and justused the dollar in its place In other cases countries have used what iscalled a crawling or soft peg where the currency is allowed to shift gradu-ally over time or move within a pre-specified range with respect to an-other currency

Many countries overvalue their exchange rates for long periods oftime Overvalued exchange rates usually result from differences in in-flation rates between a country and its major trading partners Domes-tic inflation in the presence of fixed exchange rates means that importsseem cheaper relative to domestically produced goods At the sametime exports from the country become more expensive abroad But themarket for foreign exchange in the country will not balance unless capitalflows in thus the value of the currency is driven up Any policy thatcreates inflationary pressures such as government budget deficits orexpansion of the money supply will when combined with fixed ex-change rates lead to overvaluation Countries maintain overshyvaluedexchange rates by controlling the movement of foreign exchange andforeign investment (see Box 18-2)

Countries overvalue exchange rates in part to keep domestic pricesdown More imports and fewer exports mean more goods in the do-mestic market The greater the domestic supply of goods relative todemand the lower the price The result of an overvaluation is that theprices of traded goods produced in the country such as many agricul-tural goods are depressed relative to those of non-traded goods andservices Thus rural incomes tend to be lowered compared to urbanincomes

Devaluation can correct the problem at least temporarily but un-less fiscal and monetary policies are changed to reduce either govern-ment expenditures or aggregate demand inflation will rather quickly

373


result in a reoccurrence of the overvalued exchange rate Devaluationcan also cause hardship on those who produce non-tradable goods andservices and consume tradable goods for example civil servants andcertain groups of factory workers Food prices generally rise in responseto currency devaluation helping farmers and hurting urban consum-ers Policies are often needed to protect the welfare of the very poorwhen a devaluation occurs especially if the currency has been allowedto become substantially overvalued and a large adjustment is needed

Over time countries that are open to international capital flowshave found that either a fixed exchange rate or a flexible exchange ratethat is allowed to float against other currencies is more sustainable thanan exchange rate that is managed by the government so it adjusts gradu-ally Countries with a history of sharp monetary instability or that areclosely tied in trade and capital flows to another country seem to bethe ones who choose the fixed rate system

Interest Rates The price of capital investment is represented bythe interest rate The interest rate reflects in part the productivity ofcapital or the opportunity cost of using capital for one purpose ratherthan another Interest rates also reflect risk and the value of current asopposed to future consumption Interest rates are determined by theinteraction of the supply of investment funds basically household sav-ings and the demand for these funds

Governments can influence interest rates by setting them for pub-lic credit sources and by imposing regulations such as reserve require-ments on private financial sources In addition the method by which

BOX 18-2HOW a GOVERNMENT MAINTAINS

an OVERVALUED EXCHANGE RATESince supply and demand factors determine exchange rates if a govern-ment wishes to fix the official rate at a level other than its equilibrium thenit must intervene in the foreign exchange market It can support an over-valued rate by selling foreign exchange reserves (dollars or some othercurrency) and purchasing its own currency thus supporting its value Over-valuation thus diminishes foreign reserves and cannot be sustained forlong periods of time In the absence of significant reserves a governmentcan restrict access to foreign currency at the official rate and thus effec-tively ration the commodity (foreign exchange) for which excess demandexists This rationing is usually implemented by imposing direct currencycontrols by controlled allocations of foreign exchange to preferred import-ers and by tariffs and other barriers to imports

374


the government finances a fiscal deficit affects interest rates If a deficitis financed by domestic borrowing then interest rates may rise in re-sponse to the increased demand for funds The alternative means offinancing deficits is to print money a policy which is inflationary Thushigher interest rates in the presence of budget deficits can help keepinflation down Macroeconomic policy with respect to interest rates oftenrepresents an attempt to balance the value of capital in increasing pro-duction with the valuation of future relative to current consumption

Governments may set a maximum interest rate that can be chargedby lenders in the country If the rate is set too low excess demand forcredit is created because demand for credit will exceed its supply Un-der these circumstances credit has to be rationed to borrowers who arefortunate to have access to the funds and private lenders will haveincentives not to lend or to circumvent the regulations Formal lendinginstitutions may be forced out of business Moneylenders and otherinformal credit sources not under the control of the government find iteasier to charge higher rates

When interest rates are controlled they may even be set below theinflation rate When this happens the real interest rate is in fact nega-tive2 Negative real interest rates create credit crises since they spurdemand for borrowing far above the supply of savings Even less ex-treme interventions can have negative effects however as they encour-age use of government credit for those who can obtain it and drive outprivate credit institutions

Wage Rates The primary source of income for most people in theworld is returns to their labor Hence creating jobs at decent wages isessential to reductions in poverty and hunger Governments recognizethe importance of labor remuneration and often set minimum wages inan attempt to raise people out of poverty Unfortunately in low-income countries where most people are self-employed minimum-wagelegislation is a relatively impotent tool for raising returns to labor andcan have unintended effects that hurt labor

Labor markets are complex because they are segmented by skilllevels occupations and locations In rural areas labor arrangementsmay include payment in kind (eg food or other goods) may involveconditional access to a piece of land or may depend on other specialrelationships between employers and workers that are determined bylocal customs or institutions Wages for unskilled workers in these ar-eas may be close to the average product of labor rather than the mar-

2 The real interest rate is equal to the nominal interest rate minus the rate of inflation

375


ginal product (Chapter 6) This level in turn is close to a basic subsis-tence level Minimum-wage legislation is virtually unenforceable in ruralareas in developing countries

In urban areas minimum wage legislation has been successful inlarge industries and government organizations People who are able toobtain jobs at or above the minimum wage clearly benefit Unfortu-nately by raising the price of labor minimum wage legislation reducesthe demand for labor by these industries and organizations Thus un-employment (or excess supply of labor) may result in the short run Inthe long run the industries may adapt more capital-intensive technolo-gies further displacing labor or close their doors and move to a coun-try with lower and more flexible wages The possibility of higher wagesin the formal sector may attract more migrants to the urban area evenif jobs are scarce This influx of migrants will also swell the informalsector Consequently minimum-wage legislation in the formal sectormay over time depress wages in the informal sector In summary wagesare an important macro-price especially to the poor but governmentshave little ability to raise people out of poverty by legislating wage levels

Prices of Agricultural Products and Land Agricultural prices areinfluenced by government interventions in output and input marketsas discussed in Chapters 15 and 16 Price supports input subsidiesexport taxes and so on directly influence the terms of trade betweenthe agricultural and nonagricultural sectors Fiscal and monetary poli-cies and macro-prices however usually have even larger effects on theterms of trade between the sectors than do the more direct price poli-cies For example the agricultural sector produces a high proportion oftradable commodities Thus an overvalued exchange rate that encour-ages imports and discourages exports typically has a strong negativeeffect on the agricultural sector

When macro-policies and prices discriminate against the agricul-tural sector so that agricultural prices are depressed downward pres-sures are placed on land prices as well Incentives are reduced for im-proving the land base or for developing technologies to utilize landmore efficiently

In summary macro-prices reflect basic economic conditions in aneconomy Unless agricultural productivity is increased simply distort-ing these prices through government policies is likely to hinder the de-velopment process and create distributional effects that hurt the ruralpoor

376


WHY GOVERNMENTS PURSUE PARTICULARMACROECONOMIC POLICIESWhy do governments in developing countries often follow macroeco-nomic policies that discriminate against rural producers in favor of ur-ban consumers Why do they sometimes change course and introducestructural adjustment programs that may partially reverse this discrimi-nation Political leadership and individual personalities play an im-portant role at the simplest level governments follow policies that re-spond to the balance of political power within their countries Theydistribute income in particular ways to help certain sectors to correctpast problems such as external debts to reduce inflation and to react tochanging world conditions Because food is a wage good (ie food is ahigh proportion of consumer budgets in developing countries) the in-terests of urban consumers coincide with owners of industrial firmsConsumers view lower-priced food as higher real wages while indus-trialists see it as serving to decrease upward pressure on nominal wagesThus an overvalued exchange rate for example is a tempting quick fixfor stimulating industrial growth distributing income toward politi-cally influential urban consumers and industrialists and reducing in-flationary pressures

The growth stimulus of macroeconomic intervention is often short-lived Discrimination against agriculture reduces agricultural growthand investment and foreign exchange earnings from agricultural ex-ports A severely overshyvalued exchange rate can turn a food exporterinto a food importer Rural opposition to the macro-policies increasesover time inflation worsens due to higher food prices and unemploy-ment grows Then because pressures from urban groups continue gov-ernments may subsidize agricultural inputs raise output prices throughsubsidized market margins for food staples and undertake other mea-sures to reduce prices to consumers In other words they pursue par-tially offsetting policies Governments institute such complex policiesdue to political expediency Urban consumers and industrialists arepotent pressure groups that demand low food prices and relatively morepublic goods for urban compared to rural areas

Transactions Costs and Collective ActionBoth macroeconomic interventions and sectoral policies provide ben-efits to politically-favored groups Individuals may belong to severaldifferent groups and may be simultaneously helped and harmed bydifferent policies The net benefit obtained from policy often calledpolitical rents is rarely clear Macro-policy interventions are par-ticularly difficult to observe Thus governments may provide direct

377


subsidies to agricultural producers that are more than offset by over-valued exchange rates and still appear to be helping farmers Food pricesare kept low in urban areas at least in the short run and urban indus-trialists and civil servants with better information than most farmerspress for the continuation of exchange rate distortions and other formsof protection that benefit the urban sector

Rural and urban households can form coalitions and lobby collec-tively for their interests The policy preferences of politicians and othergovernment officials are affected by the relative strength of these ruraland urban lobby groups The urban lobby is often quite strong becauseit may represent a coalition of households students civil servants mili-tary factions labor unions and industrialists

It is not the sheer size of the urban lobby that gives it power toinfluence policy The rural lobby is even larger in many developingcountries However the urban lobby is much more concentrated geo-graphically and this concentration facilitates its ability to organize Stu-dents are concentrated near universities civil servants in governmentoffices and labor unions and industrialists in a relatively small con-centrated formal sector The military is highly organized If people de-cide to protest rising food prices the costs of organizing and comingtogether for this purpose are relatively small in the urban sector

Because the urban lobby is made up of several relatively small buthomogeneous groups members of these groups see the benefits of or-ganizing collectively to press for their interests Rural interest groupsparticularly small-scale farmers are so dispersed that individual mem-bers often see few benefits to themselves Communication is difficultso that even if collective benefits are perceived the costs of organiza-tion and action are prohibitively high Ironically as development pro-ceeds and the agricultural sector declines in relative and absolute sizeits ability to organize and lobby often increases Also the cost to thegovernment of subsidizing a small agricultural sector is lower than alarger sector Therefore once a country is relatively well-developed itusually reduces its discrimination against agriculture

Sometimes government policies are motivated by corruptionamong politicians and other officials Policy distortion creates gains forcertain groups and some of these gains are appropriated by individu-als in public service as payment for instituting the policies

Historical Factors Structural Adjustment and ExternalForcesA government at any particular point in time is constrained by the ac-cumulated effects of past policy choices interacting with worldwide

378


economic conditions One of the most dramatic examples of historycolliding with external forces involves government debt It is naturalfor developing countries to go into debt to some degree but at the startof the 1980s there was a simultaneous increase in international realinterest rates and decline in world commodity prices that sharply in-creased the difficulty of repayment Many countries particularly in LatinAmerica and in Africa had no choice but to devalue their currenciesand cut consumption expenditures in an effort to generate more for-eign exchange Similarly painful ldquostructural adjustmentrdquo programs wereforced on other countries in the 1990s when their sources of capitalsuddenly disappeared The term structural adjustment is often associ-ated with policies aimed at repaying government debt usually foreigndebt This adjustment typically involves a devaluation of the foreignexchange rate to increase exports and reduce imports a reduction ingovernment spending and increase in tax collection sale of govern-ment assets and the removal of restrictions on economic activity Thedevaluation privatization and various types of liberalization may beneeded because external debts cannot be reduced without earning orsaving foreign exchange Reduced government spending and increasedefficiency in tax collection can bring spending more in line with rev-enues The removal of policy distortions is needed to stimulate eco-nomic growth although growth effects may take several years

Some policy changes are made necessary by changing world eco-nomic conditions A recession in the industrialized countries for ex-ample can reduce the demand for products from developing countriesHigh interest rates elsewhere in the world can exacerbate debt prob-lems for developing countries A shock to the oil market can strain ex-change reserves for countries without petroleum Consequently somepolicy changes are necessitated just to react to these external forces Inthe next section we examine how these world macroeconomic linkagesoccur and how they affect developing countries

WORLD MACROECONOMIC RELATIONSHIPS3

Starting from the end of World War II when there was virtually nointernational capital market the international monetary system hasgrown to the point that transfers of capital between countries dwarf thevalues of international trade in goods Capital flows ensure a close link

3 Parts of this section draw on and update material from G Edward Schuh ldquoThe Chang-ing Context of Food and Agricultural Development Policyrdquo in J Price GittingerJoanne Leslie and Caroline Hoisington eds Food Policy Integrating Supply Distri-bution and Consumption (Baltimore Johns Hopkins University Press 1987) pp 78ndash87

379


between interest rates and exchange rates across countries and heavilyinfluence countriesrsquo trade and their fiscal and monetary policy options

A major change in the structure of the international economy wasthe shift beginning in 1973 from a system of fixed exchange rates to oneof bloc-floating exchange rates With the fixed system currencies aroundthe world were fixed for long periods of time against the dollar4 Withthe bloc-floating system the values of major currencies are allowed tochange rapidly against each other in response to market conditionsSome developing-country currencies however remain fixed to the majorfloating currencies such as the US dollar

Implications of Well-Integrated Capital Markets and Bloc-Floating Exchange RatesA well-integrated international capital market and bloc-floating ex-change rates mean that interest rates capital movements exchange ratesand trade are interconnected They mean that fiscal and monetary poli-cies in each country are tied into a single global macro-economy with acommon core rate of inflation and interest rates For example when theUnited States issues bonds at higher interest rates to pay for a govern-ment budget deficit the capital to buy those bonds comes from a widerange of foreign as well as domestic sources This foreign purchase ofUS bonds increases the demand for dollars driving up the value ofthe dollar It also reduces the capital available for other purposes rais-ing worldwide interest rates The higher interest rate makes it harderfor developing countries to pay off their remaining foreign debt forc-ing them to reduce consumption more than they otherwise would5

The higher value of the dollar also makes US exports more ex-pensive abroad and encourages imports into the United States Devel-oping countries with currencies that are tied to the dollar will also find

4 The fixed exchange-rate system had been established at the Bretton-Woods Confer-ence in 1944 Trade expanded rapidly under this system but the system eventuallybecame unworkable when certain currencies particularly the US dollar becameseriously overvalued and others particularly the German deutschemark and Japa-nese yen became severely undervalued

5 Capital flows can also keep interest rates low in some cases For example in 2005China purchased many US bonds even though interest rates were low whichmeant that the United States did not have to raise interest rates to sell bonds tofinance its budget deficit These low rates kept the demand for home mortgagesand other loans strong stimulated the US economy as people were willing to bor-row and spend and contributed to a bubble in the housing market That bubblesubsequently burst and the housing market collapsed with major recessionary im-plications

380


it harder to export and easier to import Then tradable goods sectorssuch as agriculture in those countries suffer from downward pressureon prices

Governments often try to partially isolate their domestic agricul-tural sectors from changes in international markets but any such isola-tion would mean loss of gains from trade and from access to foreigncapital to facilitate development Consequently developing countriesusually choose to absorb a certain amount of instability in interest ratesexchange rates etc caused by world macroeconomic forces in order tobenefit from international goods and capital markets These countrieshowever may need to (1) protect the poorest of the poor through tar-geted food subsidies or other means of ensuring basic food securityand (2) take full advantage of international schemes aimed at stabiliz-ing foreign exchange such as the compensatory finance arrangementsdiscussed in Chapter 17 The IMF does play a role in trying to helpstabilize LDC economies during times of financial crises In a sense theIMF is the closest thing the world has to an international central bankHowever the relatively small resource base of that institution and lackof explicit mandate keeps its role circumscribed as discussed below

Changes in International Comparative and CompetitiveAdvantageComparative advantage increasingly is less influenced by physical re-source endowments and more by human capital endowments Gov-ernment spending on education and agricultural research and the rapidinternational diffusion of certain technologies particularly biotechnol-ogy has the potential to influence human capital accumulation in manydeveloping countries by improving education nutrition and incomesThese changes may eventually lead to restructured trade patterns

Government macroeconomic and sectoral protectionist policieshowever can suppress underlying comparative advantage and distorta national economy away from what the physical and human resourcebase would seem to dictate As exchange rates swing so too does com-petitive advantage in directions discussed previously For example along decline in the value of the US dollar can mislead US producersand producers in other countries about their long-term ability to com-pete A sustained rise in the value of the dollar can send opposite butstill misleading signals These movements can be induced by US andforeign government macroeconomic policies that do not reflect anychanges in fundamental comparative advantage

381


The External Debt Problem Causes Effects and PotentialSolutionsIt is natural for the governments of developing countries to borrow tofinance productive investment As long as a country has investmentopportunities in the public or private sector that yield returns comfort-ably above the cost of funds in the world market then such invest-ments should be made even if external borrowing is required The coun-try will grow more rapidly and can export to repay the loan in the fu-ture A country may also borrow at times to finance consumption apolicy that would be appropriate for example if a natural disaster or ashort-run economic shock such as a sharp oil-price change makes itreasonable to sustain consumption even though current income is lower

Borrowing is imprudent however when the debt is increased tocover longer-run consumption questionable investments large gov-ernment deficits or capital flight out of the country6 Imprudent large-scale borrowing by the government occurred in many developing coun-tries during the 1970s particularly in Latin America and Sub-Saharan

The poorest of the poor may need to be protected by targetedfood subsidies during structural adjustment

6 Capital flight occurs when capital leaves a country due to perceived risk at homeCapital flight however is difficult to distinguish from normal capital flows It of-ten occurs when the government borrows foreign exchange and makes it availableto residents at a subsidized price People acquire this foreign exchange if they canand move it to banks or other investments abroad

382


Africa The result was a debt crisis that began in the early 1980s and hasonly slowly receded over the past three decades When a country has adebt crisis it lacks foreign exchange to make payment of interest andprincipal on its loans

Causes of the Debt Crisis When a country makes more paymentsto the rest of the world than it receives in payments it has a currentaccount deficit (see Box 18-3) It has to sell off assets or borrow to financethe deficit Developing countries began running abnormally large cur-rent account deficits beginning in 1973 when the price of oil skyrock-eted During the 1970s commercial banks received a flood of dollarsfrom the oil-producing countries The banks loaned these dollars todeveloping countries to finance their current account deficits SeveralLatin American and Asian countries seemed to be good risks becausethey had grown rapidly for several years In Africa growth had for themost part not occurred but countries there borrowed from officialsources such as the World Bank for development purposes

By 1980 many developing countries were heavily in debt whichbecame suddenly much harder to repay when worldwide interest ratesrose sharply due to tight monetary policy in the United States and Brit-ain Many of the commercial loans to developing countries had beenmade at adjustable interest rates and borrowers found it hard enoughto pay interest let alone repay principal

Repayment of debt became even harder when a world recessionstruck depressing demands for LDC exports Even the demand for oildeclined resulting in a drying up of money for new loans The firstreaction of countries seriously in debt was to refinance the loans andspread them out over a longer period of time Several countries how-ever found it difficult to service their debts (make scheduled interestand principal payments) or to acquire new funds For Latin Americadebt servicing exceeded 50 percent of the value of the regionrsquos exportsduring the early 1980s and much of the debt was owed on short-termloans at variable interest rates that were rising

The first of the large debtors to announce it could no longer ser-vice its debts was Mexico in 1982 Mexico was a net oil exporter but ithad borrowed heavily against anticipated future oil revenues Theseoil revenues declined with the worldwide recession and Mexico wasleft with a debt of more than $80 billion with few exports to make re-payments Banks and the US government provided Mexico with newloans to forestall the repayment problem but it was then clear that theworld community had a major financial crisis on its hands that wouldhave to be addressed As Mexico renegotiated its loans the crisis hit

383

BOX 18-3CURRENT ACCOUNT DEFICIT

The current account deficit represents the excess of spending on importsand interest payments on the external debt over export revenues In otherwords it equals the trade deficit plus interest payments The current ac-count deficit in a particular year also represents the increase in the netdebt for a country Unless the trade surplus is large enough the mereexistence of an external debt means that interest on that debt will causethe debt to keep growing

other countries as well By 1986 more than 40 countries in Latin AmericaAfrica and elsewhere had encountered severe financial problems Ex-cept for the Philippines countries in Asia largely escaped severe debtproblems

Comparisons of the external debt situation between 1970 and 2006for low income middle-income and several individual countries arepresented in Table 18-1 For developing countries external debts as apercent of GNP were two to three times as great in 1990 as they were in1970ndash1975 By 1989 developing countries owed more than $13 trillionDebt service was running more than $100 billion per year Twelve ofthe 17 countries identified by the World Bank as heavily indebted werein Latin America and the Caribbean Africarsquos debt of more than $110billion was three times the value of all its annual exports Cote drsquoIvoireprovides an example of the severity of the debt problem with a popu-lation of 117 million in 1989 it owed $154 billion or $1300 per citizenin a country with an annual per capita income of $790 Forty-one per-cent of the countryrsquos export receipts were needed just to service thedebt

Since the early 1990s there have been gradual debt reductions inseveral countries especially middle income countries but many othercountries have continued to experience high debt levels Some attemptshave been made to forgive debts of several of the most highly-indebtedleast-developed counties but debt problems have proven persistent Inaddition a number of Latin American and East Asian countries experi-enced other short term financial crises in the 1990s as discussed below

Effects of the Debt Crisis When a country attempts to reduce itsexternal debt domestic consumption must be cut to free up resourcesto produce goods that can be exported to earn foreign currency for debtservice Reductions in import demand are needed to save foreign ex-change Not all of the reduced spending affects traded goods Some of


384


it falls on non-traded goods and services when labor and capital shift tothe production of traded goods for export

Within the country prices of traded goods must rise relative towages and other prices to encourage the production of traded goodsand to discourage domestic consumption Exchange rate devaluationis the typical means of bringing about these adjustments in relativeprices Devaluation however takes time to have the desired effect Thuspolicymakers typically find ways to reduce their imports in the shortterm by means such as imposing tariffs or import quotas Because someof the imports are raw materials or producer inputs economic growthoften is slowed as well

Spending cuts and devaluations are painful since they inherentlyinvolve reductions in real income for the country The cuts usually in-clude reductions in basic social services that help the poor The devalu-ations effectively cut real wages As the currency is devalued the coun-try has to give up more in terms of domestic resources to earn each unitof foreign currency The country is essentially selling its labor and otherresources more cheaply on world markets

Many developing countries had overvalued exchange rates priorto the debt crisis thus adjustments were needed irrespective of the cri-sis The devaluations raised the prices of many agricultural exportablesand importables thus helping the farm sector However the resultinghigher food prices hurt the poor particularly The magnitude of thisdebt-induced hurt is difficult to judge because several of these coun-tries would have had to adjust their economies even without the debtcrisis But there is little doubt that the poor in developing countrieshave shouldered a large burden in adjusting to the crisis

TABLE 18-1 INDICATORS OF EXTERNAL DEBTfor DEVELOPING COUNTRIES

Country Total external debtor country group as a percent of gross national income

1970-1975 1980 1990 2000 2006

Low income 102 164 41 563 316Middle income 186 319 399 365 252Argentina 201 484 617 56 586Brazil 163 312 251 39 187Morocco 186 533 971 49 287Philippines 207 538 693 64 471

Source World Bank World Development Indicators Online Database

385


Cuts in government spending have also induced recessions thatreduced government revenues When countries can no longer borrowenough abroad to meet shortfalls they often print money Printingmoney usually increases inflation Devaluation and import restrictionscontribute to these inflationary tendencies They also hurt markets forUS farm products

At the time the debt crisis first hit there was a major concern overthe impending peril to the world financial system The fear was thatsuch countries as Mexico Brazil and Argentina would default on theirloans causing large commercial banks to go bankrupt The threat to thebanking community eventually receded as threatened banks reducedtheir outstanding claims on developing countries and increased therevenues they set aside to guard against disruptions in debt service

The threat to the poor in developing countries however has onlyreceded slowly and in many countries not at all In parts of LatinAmerica and the Caribbean real wages have gradually increased butnot in all countries In Sub-Saharan Africa per-capita incomes havecontinued to stagnate Governments in many developing countries havecut their education and health budgets Not all of these declines weredue to debt problems but many were The rise in poverty and the re-duction in social services have led to increased hunger and malnutri-tion in some countries Environmental problems have increased as wellas countries exploit resources to meet current food and foreign exchangeneeds

Solutions to Debt Problems External debt problems of develop-ing countries impose costs on both debtors and creditors One potentialsolution is for developing countries to default on the loans Total de-fault would have the advantage of relieving pressures to cut govern-ment spending and to export more to service the debt The disadvan-tages are that the creditors could seize debtorrsquos overseas assets andcreditors might seize payments to firms that attempt to export to thedebtor and payments made by firms that attempt to import from itThus the country would lose some potential gains from trade In addi-tion the country would be less able to borrow again for several yearsThis combination of disadvantages has meant that few countries havetotally defaulted on their loans although some countries have stoppedpayments or made only partial payments for a period of time (eg PeruBrazil)

When considering solutions to debt problems it is important toseparate the two different groups of countries whose governments havelarge debt problems One group consists primarily of low-income

386

mostly African countries that owe money largely to governments or tomultilateral lending agencies The second group is composed of theheavily indebted countries primarily in Latin America that owe moneymainly to commercial banks

Both groups have high levels of debt but otherwise their circum-stances are different The low-income African countries possess lim-ited domestic resources such as oil or minerals do not own much abroadhave had slow income growth for reasons primarily unrelated to debtand have continued to receive new loans in excess of debt service Thecountries that owe most of their debts to commercial banks by con-trast own more resources (for example Mexico Venezuela Nigeriaand Ecuador have oil reserves) have a great deal of wealth abroad inmany cases and have had economic growth rates substantially reducedby their debt

Because the lowest-income debtors owe mostly to governmentsthe creditor countries can mandate debt relief or restructuring withoutinterfering in private international capital markets Creditors can re-spond to the debt crisis in ways consistent with their humanitarian be-liefs or more likely their overall foreign policy objectives Low-incomedebtor countries can turn to the Paris Club for help in resolving debtissues (see Box 18-4) Because many loans to African countries are atbelow-market interest rates (subsidized) rescheduling these loans byextending the repayment period can significantly reduce the burden tothe debtor Recently partial debt forgiveness for some of the poorestcountries has occurred and more has been pledged The EnhancedHeavily Indebted Poor Country (HIPC) debt relief initiative establishedby the World Bank and IMF in 1996 reduced debt for 28 HIPCs andthe Multilateral Debt Relief Initiative (MDRI) agreed to by G-8 coun-tries in 2005 provided additional debt relief to more HIPCs

The solutions to debt problems for the heavily-indebted countriesthat have primarily commercial debts are different from those for theHIPCs because whatever solution is arrived at must operate within thecontext of international capital markets that include commercial banksAny solution will affect the distribution of the debt burden among debt-ors private creditors and the public in creditor countries

Several potential solutions to the commercial debt problem havebeen proposed and some partially implemented Most proposals in-volve a combination of debt rescheduling and restructuring of economicpolicies within the debtor nations Other proposals include debt-for-equity swaps cash buybacks of debt and debt-for-conservation swapsDebt rescheduling involves extending the repayment period for theloans altering interest rates forgiving part of the principal or some


387


combination of the three Efforts to restructure economic policies in-volve reducing exchange rates to discourage imports and to encourageexports cutting government spending and otherwise liberalizing theeconomy through reduced government intervention in markets andmarketing

Most countriesrsquo debt sells at a discount on a secondary market inwhich the debt can be shifted from bank to bank or to other institu-tions The debt sells at a discount because creditors believe they willnot be repaid in full For example each dollar of Perursquos debt sold forabout 5 cents on the secondary market in 1991 Debtor countries cansometimes buy back part of their debt with cash or by swapping gov-ernment-owned assets (such as stock in publicly owned companies)Buying back the debt seems to make sense because the value of thedebt on the secondary market is only a fraction of the face value of theloan There have been few buybacks and swaps however because coun-tries lack the cash are uneasy about foreign ownership of their assetsand the secondary value goes up when they attempt to buy back thedebt In a few cases for example in Costa Rica outside groups boughtup and eliminated part of the debt in exchange for government assur-ances of protecting rainforests or other natural resources This type ofactivity is called a debt-for-conservation (nature) swap

Rescheduling debts over a longer period of time at a fixed but be-low market interest rate would eventually solve the debt problem be-cause countries could grow out of their debt However no single bankhas an incentive to act alone Debt reduction like domestic bankruptcy

BOX 18-4THE PARIS CLUB

The Paris Club is a forum for negotiations on countriesrsquo debts to govern-ment creditors The Club formed in 1956 in response to Argentine debtdifficulties has no set membership The participants in any Paris Club ne-gotiation are the debtor government and its creditors who traditionally meetunder the chairmanship of a senior French treasury official

All creditors are treated equally in Paris Club rescheduling negotia-tions Debtor countries approaching the Paris Club are usually required toconclude an agreement with the IMF for an IMF loan and an IMF-approvedprogram for restructuring economic policies An example of IMF condi-tions for a structural adjustment program would be reductions in govern-ment spending and fewer restrictions on exports

Source P Krugman and M Obstfeld International Economics (Cambridge Mas-sachusetts Institute of Technology Press 1988) p 596

388

needs an institutional setting to bring it about Even when it is in thecollective interests of the banks to reduce the debt each bank has anincentive to insist on full payment of its own loans If one bank doesgrant a concession to lower the interest rate or principal it becomesmore likely that other banks will collect their loans Hence each bankwaits around for other banks to voluntarily reduce the interest rate orprincipal owed so they can get a ldquofree riderdquo This free-rider problemexists for debt-equity swaps cash buybacks and other proposed solu-tions as well

Third developed countries have been reluctant to play too large arole in debt relief for fear of large budget expenditures While there arestrong humanitarian grounds for debt relief through Paris Club nego-tiations for the poorest countries the arguments carry less weight fordebt relief in Latin America if that relief comes at the expense of foreignassistance to even poorer countries in Africa and Asia Therefore theworld continues to muddle along with only gradual debt reduction

Regardless of the method used to reduce the debts it would beenhanced by lowering trade barriers to developing country exportsThese barriers make it difficult for the countries to acquire foreign ex-change for debt service For this reason the WTO negotiations mayhave a role to play in solving the debt problem

Financial Crises in Latin America and AsiaIn the 1990s a series of shorter-run financial crises occurred in LatinAmerica (1994ndash95) East Asia (1997) Russia (1998) and Brazil (1998ndash99) The impacts of the crises spread to other countries and regionsThere were some similarities among the crises In most cases there wereincreased private capital flows into the countries shortly before the cri-ses including both bank lending and private investments The IMFgradually relaxed its rules on capital flows and encouraged capitalmovements in the 1990s Real exchange rates generally had appreci-ated as well especially in Mexico and Thailand When investors be-came nervous they pulled their money out and the governments wereforced to let their currencies depreciate Problems worsened when neigh-boring countries were forced to depreciate their currencies because in-vestors as well as investors pulled out their money As capital dried upin the affected countries investment stalled and the countries went intodeep recessions In some cases the countries had problems with deficitspending or inflation before these crises but in many cases did not

The crises demonstrated that completely deregulated capitalflows carry both benefits and costs Advantages to the borrowersinclude resources to finance investments with high social returns


389


and to compensate for balance of payments problems and recessionsThe disadvantages are that foreign investors might pull their moneyout quickly thereby destabilizing the economy Also the money maygo toward projects that are too risky if the investors think that the gov-ernment or the IMF will bail them out if there is a problem In additioncapital flows can affect the exchange rate If capital suddenly starts toflow out the government must choose between higher interest rates ordepreciation of the exchange rate7

Governments can reduce the chances of financial crises by stron-ger regulation of domestic banking and financial institutions andimproving information flows with respect to economic and financialconditions The IMF can assist by helping devise solutions in times ofcrisis while providing some financial assistance when private fundsare not available The IMF must be sophisticated in its ability to distin-guish between countries that are being fiscally irresponsible from thosethat are financially sound but are suffering sudden capital outflowsdue to temporary regional or global events

Governments can not simultaneously fix the value of the exchangerate and use macroeconomic policy tools to offset economic problemsif capital is allowed to flow in or out of the country freely Thereforesome countries choose to have a flexible exchange rate with relativelyfree capital flows and attempt to manage their macroeconomic poli-cies Others choose to fix their exchange rates and institute some con-trols on capital flows to minimize the danger of financial crises Thiscombination allows them to manage their macroeconomic policies Athird group of countries decide to fix their exchange rates allow freecapital flows but give up the ability to influence their macro-economiesThe latter countries are usually small ones with major trading partnersto which they tie their currency They also want to encourage strongforeign capital investment and therefore do not want to institute capi-tal controls

Lessons from the Global Financial CrisisIn 2008-09 a financial crisis in developed countries led by rapid depre-ciation in housing assets as a result of poor lending practices and laxfinancial regulation in the United States spurred a deep global reces-sion Due to integration of product and capital markets the effects werefelt throughout the world including poor countries Trade flows werereduced capital became scarce unemployment was up and more

7 Joseph Joyce ldquoThe IMF and Global Financial Crisesrdquo Challenge July-August 2000p 98

390

people slipped below the poverty line The recession hit the poor dou-bly hard as many were experiencing the effects of the food price crisisdiscussed in Chapters 1 and 3 One lesson for developed countries wasthe need to tighten regulations not only in the banking sector but in theinsurance sector that contributed much to the crisis A second lesson isthe need for central banks such as the US Federal Reserve to pay greaterattention to asset bubbles as they occur One lesson for developing coun-tries is the need to institute more safety nets for the poor that can bedeployed immediately when global conditions turn sour due to marketdisruptions outside their control

SUMMARYMacroeconomic policies have a strong influence on prices on market-ing margins and hence on incentives for economic agents A macro-economy can be described in terms of aggregate demand supply orincome Policies in developing countries are frequently aimed at thesupply side of the economy Both fiscal and monetary policies influ-ence inflation Developing countries often go into debt because of manypressing needs and limited tax revenues

Governments use foreign exchange rates interest rates and wagerates to influence trade investment and incomes Many developingcountries overshyvalue their exchange rates a policy that discourages ex-ports and encourages imports They often subsidize interest rates andset minimum wages for the urban formal sector Agricultural and landprices are influenced by macroeconomic policies

Governments pursue particular macroeconomic policies to stimu-late economic growth distribute income correct debt problems lowerinflation and so on Policies are influenced to a large extent by urbanlobbies Forces external to the country also come into play Well-integrated capital markets and bloc-floating exchange rates tie eco-nomic policies of developing to developed countries

While it is natural for governments in developing countries to bor-row to finance investment massive borrowing during the 1970s fol-lowed by high interest rates and tight money in the early 1980s led to asevere debt crisis Many of the loans in Latin America were from com-mercial banks and many of the loans in Sub-Saharan Africa were fromofficial sources Countries were forced to adjust their economies by ex-porting more importing less and reducing government spending inorder to pay off debts Attempted solutions to the debt crisis have beenslow to reduce LDC debts Much of the burden of adjustment continuesto fall on the developing countries themselves Structural adjustment


391


programs often hurt the poor in the short run suggesting a need forsafety-net programs and increased debt forgiveness

In recent years several developing countries have experiencedshort-run financial crises in which private capital has flowed out rap-idly causing severe economic downturns Capital controls are a pos-sible remedy for capital outflows but come at the cost of reduced for-eign investment Some countries with flexible exchange rates choose toallow free capital flows but then attempt to manage their macro-policies to offset the dangers of the sudden capital flows

IMPORTANT TERMS AND CONCEPTSBalance of payments Fiscal policyBloc-floating exchange rate Free riderCapital flight International capital marketCash buybacks Macro-pricesCurrent account deficit Minimum wageDebt crisis Monetary policyDebt-for-conservation swaps Money supplyDebt-for-equity swaps Paris ClubDebt relief Secondary marketDebt rescheduling Structural adjustment programExternal debt Urban lobbyFinancial crisis

Looking AheadInternational relations between more-developed and less-developedcountries are influenced in major ways by foreign assistance pro-grams In the following chapter we discuss the various types of for-eign assistance motivations for the aid and effects on the less- andmore-developed countries

QUESTIONS for DISCUSSION1 What are the three ways a macro-economy can be described so as to

arrive at gross domestic product (GDP)2 What do we mean by a countryrsquos ldquofiscal policyrdquo3 What are the two primary monetary policies that can be used to fi-

nance a government deficit and what are their effects4 What are the major macro-prices that governments often try to set5 Why do countries overvalue their currencies and what is the effect of

overvaluation6 What are the advantages of high versus low interest rates

392

7 How are wage rates determined and what are the advantages anddisadvantages of minimum wage laws

8 How are land prices affected by macroeconomic policies9 Why do governments pursue particular macroeconomic policies10 What is a structural adjustment program and what are its effects11 How does a bloc-floating exchange rate system differ from a fixed

exchange-rate system12 How are interest rates capital movements exchange rates and trade

interconnected13 How might a macroeconomic policy suppress the comparative ad-

vantage of a country in producing a particular good14 Why is it natural for developing countries to borrow from devel-

oped countries15 Describe the major causes of the debt crisis16 Why have many heavily indebted countries devalued their curren-

cies17 Why have voluntary rescheduling of debt servicing by commercial

banks not resolved the debt crisis18 What are the advantages and disadvantages of cash buybacks of

debt Of debt-for-equity swaps Of debt-for-conservation swaps19 Why are the urban poor often hurt more by structural adjustment

programs than are semi-subsistence farmers20 What are the pros and cons of a developing country defaulting en-

tirely on its debts21 What were the causes of financial crises in Asia and Latin America

in the 1990s22 Who are the HIPCs

RECOMMENDED READINGSCohen Benjamin J ldquoWhat Ever Happened to the LDC Debt Crisisrdquo Chal-

lenge vol 34 (May-June 1991) pp 47ndash51Joyce Joseph ldquoThe IMF and Global Financial Crisesrdquo Challenge vol 43

(July-August 2000) pp 88ndash107Rogoff Kenneth ldquoInternational Institutions for Reducing Global Finan-

cial Instabilityrdquo Journal of Economic Perspectives vol 13 Fall 1999


393

CHAPTER 19

Capital Flows ForeignAssistance and Food Aid

Everywhere one turns in global poverty reduction efforts high-minded rhetoric provides tattered veneer over deficient funding

mdash Jeffrey Sachs1

THIS CHAPTER1 Examines the nature of public and private capital flows to develop-

ing countries including the rationale for and major types of foreignassistance to agriculture

2 Discusses the types the objectives and the positive and negativeeffects of food aid programs in less-developed countries

3 Identifies means for improving the effectiveness of foreign assis-tance

DEVELOPMENT ASSISTANCE PROGRAMS RELATED toAGRICULTUREFlows of capital into developing countries can help overcome a short-age of capital relative to labor Private capital flows however may notbe sufficient to meet development needs for several reasons Restric-tions on investments and other forms of capital flows in developingcountries create risks for private investors as do political uncertaintyand long gestation periods for projects Many key forms of infrastruc-ture have attributes of public goods and it is difficult to charge for useof public goods All these factors reduce the willingness of the privatesector to undertake investments and hence can slow the flow of capi-tal into developing countries The absence of sufficient incentives to

1 Jeffrey Sachs ldquoA New Global Consensus on Helping the Poorest of the Poorrdquo An-nual World Bank Conference on Development Economics 1999

394


invest can also result from incomplete development of internationalcapital institutions Foreign development assistance (aid) is one pos-sible solution to help reduce the resulting capital imbalance includingassistance to the agricultural sector

Foreign aid in support of agriculture in developing countries hastaken many forms and the nature and magnitude of its effects havegenerated considerable debate Multiple objectives drive all foreign aidprograms with the result that the distribution of aid among differentcountries often bears little relation to need as manifested by hungerpoverty or presence of market failure Hence we begin this chapter byexamining the rationale for foreign assistance

Rationale for Foreign Capital Flows and AssistanceFrom a donorrsquos perspective the rationale for foreign aid in general aswell as for aid to agriculture rests on humanitarian (moral or ethical)political (strategic) and economic (commercial) grounds2 Several vari-ants of the humanitarian argument have been made based on compen-sation for past injustices uneven distribution of global natural resourcesand a moral obligation to help the least-advantaged members of soci-ety3 The premise is that the emergence of international economic andpolitical interdependencies has extended the moral basis for distribu-tive justice from the national to the international sphere Foreign assis-tance to agriculture can benefit one of the largest and poorest sectors inmost developing countries

The political self-interest rationale is based on the notion that aidwill strengthen the political commitment of the recipient to the donor(s)Aid is often given during wars and conflicts when there is an opportu-nity for political realignment or as part of a negotiated agreement toprovide aid in exchange for certain political or military actions

The argument that aid serves a countryrsquos economic self-interest isbased on the idea that aid increases exports from and employment inthe donor country For example producers of food grains in the UnitedStates benefit from food aid to the extent that it increases total quanti-ties demanded Food aid may open markets to a countryrsquos exports byinitiating commercial contacts In general foreign aid to agriculture canimprove nutrition and stimulate economic growth thereby in low-

2 See Anne O Krueger ldquoAid in the Development Processrdquo World Bank Research Ob-server vol 1 (January 1986) pp 57-58 and see Vernon W Ruttan United StatesDevelopment Assistance Policy (Baltimore Johns-Hopkins 1996) chapter 2

3 Vernon W Ruttan ldquoSolving the Foreign Aid Vision Thingrdquo Challenge vol 34 (May-June 1991) p 46

395

income countries stimulating demand for agricultural imports and byextension donor exports Much foreign assistance is tied to the pur-chase of goods such as food or equipment from the donor These pur-chases directly benefit producers in the donor countries

This complex set of reasons for foreign assistance means that for-eign aid does not always go to where need is greatest The fact that aidis given in part for donor self-interest purposes would seem to imposeon donors some obligation to ensure that the distribution and types offoreign assistance provided do not harm the recipients

The level and distribution of US foreign assistance by countryover time is shown in Table 191 In the 1960s the United States distrib-uted an average of just under $17 billion per year in 2007 dollars Mostof the top ten recipients were in Asia including a number of countriesthat later enjoyed rapid economic growth and earned high incomes asallies and commercial partners with the United States Aid flows de-clined for many years and the top-ten list evolved in response to con-flicts and peace accords Israel and Egypt were the top recipients in the1980s and 1990s In recent years total aid flows have grown back totheir level of the 1960s and Iraq and Afghanistan have risen to the topof the top-ten list while for the first time the list includes four countriesin Sub-Saharan Africa the D R Congo Sudan Ethiopia and Nigeria

Foreign Aid in the Context of Other Capital FlowsForeign aid is not the largest type of capital flow to developing coun-tries Larger flows occur in the private sector through portfolio invest-ment and through individual remittances by workers to their familiesin developing countries

Private investment consists of either portfolio investment or for-eign direct investment (FDI) Portfolio investors buy shares or bondsand can provide an important source of capital for middle-income de-veloping countries with growing financial markets FDI is the construc-tion or purchase of company-operated facilities which is particularlyhelpful if it involves the transfer of proprietary technologies and busi-ness methods Both kinds of investment can be very large and produc-tive but flows are limited to particular sectors and countries and havefluctuated widely over the years

Remittances occur when migrants send money back to their fami-lies as a gift or for investment These flows tend to be more stable thanprivate investment have grown rapidly and are now more than twiceas large as foreign aid In 2007 the total amount of remittances receivedby developing countries was estimated to have been $280 billion or 21


396


TA

BL

E 1

9-1

T

OTA

L a

nd

TO

P T

EN

RE

CIP

IEN

TS

of

US

O

FF

ICIA

L

DE

VE

LO

PM

EN

T A

SS

ISTA

NC

E 1960ndash2007

To

tal

to a

ll c

ou

ntr

ies

(mil

lio

ns

of

con

stan

t 20

07 U

S d

oll

ars

per

yea

r)

1960

-69

1970

-79

1980

-89

1990

-99

2000

-07

167

859

649

109

059

429

165

95

To

p t

en r

ecip

ien

ts (

per

cen

tag

e o

f to

tal)

1960

-69

1970

-79

1980

-89

1990

-99

2000

-07

Ind

ia20

5

Isra

el

11

8Is

rael

19

6E

gy

pt

17

4Ir

aq

19

3

Vie

t N

am9

4V

iet

Nam

10

1E

gy

pt

16

5Is

rael

13

8A

fgh

anis

tan

4 7

Pak

ista

n8

8In

dia

6

7

El

Sal

vad

or

3

6H

aiti

2

0E

gy

pt

3 6

Ko

rea

6 4

Eg

yp

t

5 6

Ban

gla

d

2

6E

l S

alv

ado

r

2 0

Co

lom

bia

2 7

Bra

zil

5 6

Ind

on

esia

5

2P

hil

ipp

ines

2 3

Ph

ilip

pin

es

2 0

Jord

an

2 4

Tu

rkey

4 2

Pak

ista

n

4

7P

akis

tan

2

2S

om

alia

1

9D

R C

on

go

2 3

Eg

yp

t3

0K

ore

a

4 0

Su

dan

2

2B

oli

via

1 5

Su

dan

2 3

Ch

ile

2 5

Ban

gla

des

h

3

8C

ost

aRic

a

1

8N

icar

agu

a

1

4E

thio

pia

2 2

Ind

on

esia

1 9

Cam

bo

dia

2

1H

on

du

ras

1 7

Ban

gla

des

h

1 3

Pak

ista

n

2

0T

aiw

an1

8Jo

rdan

2

0T

urk

ey

1

6P

eru

1

2N

iger

ia

1 2

Sou

rce

Cal

cula

ted

fro

m O

EC

D

Inte

rnat

ion

al D

evel

op

men

t S

tati

stic

s d

atab

ase

(htt

p

st

ats

oec

d

org

q

wid

s)

397

percent of their total income4 Most of these remittances were sent tomiddle-income developing countries such as the Philippines whichhave many educated and relatively high-earning migrants who chooseto invest their earnings back home Lower-income countries such asNigeria receive a small fraction of all remittances but because theirincomes are so low these remittances are very important to them Forexample the 49 least-developed countries together received only $40billion in remittances during 2007 but that represented 59 percent oftheir total income Like other flows remittances vary widely across coun-tries In extreme cases such as Haiti remittances can be 20 percent ormore of total national income whereas some very poor countries suchas Madagascar or Mauritania receive very little (see Box 19-1)

Foreign aid is different from private investment or remittances inthat by definition it uses government or philanthropic funds to serve apublic purpose Total foreign assistance encompasses official develop-ment assistance plus military assistance and export credits Often pri-vate funds from voluntary agencies are included Foreign developmentassistance as the term is used in this chapter excludes the military-related component and export credits while the term official develop-ment assistance (ODA) excludes private fund transfers as well To qualifyas any type of foreign assistance the resources transferred must be sentfrom donor(s) to a recipient without a commensurate return flow ofresources There may be good will political support and so on butdirect payments are not made in return

At one extreme foreign development assistance can occur as loansat near-market interest rates At the other this assistance can be an out-right grant In the middle the assistance can be a loan at a concessional(below-market) interest rate or with a maturity period longer than thatcommercially available5 Foreign development assistance also can comein the form of food aid or as technical assistance to provide neededexpertise To be classified as ODA by the Development Assistance Com-mittee of the Organization for Economic Cooperation and Development(OECD) the assistance must have at least a 25 percent grant element6

The grant element is defined as the excess of the loan or grantrsquos value

4 Data in this section are World Bank staff estimates updated periodically and avail-able online through wwwworldbankorgremittances

5 See Krueger ldquoAid in the Development Processrdquo pp 57ndash586 The OECD is an organization of 30 industrialized nations designed to promote eco-

nomic growth and stability among these relatively high-income countries and inthe world as a whole


398


BOX 19-1REMITTANCES as a DEVELOPMENT TOOL

Remittance transfers are generally small amounts sent to family membersthrough wire transfers banks or hand-carried to individuals in developingcountries Their importance differs by region and the top four recipientcountries are India China Mexico and the Philippines Top recipient coun-tries in terms of remittances as a proportion of national income (more than25) are Tajikistan Moldova and Honduras Rapid growth and variationacross countries suggests that improving how remittances are transferredcould have a big impact on development Efficiency can be improved bylowering the costs of and risks of transferring money through more coop-eration and better regulation of international financial institutions Stepsare also needed to improve the enabling environment within recipient coun-tries through reforms of banking systems more transparent rules of ac-cess encouraging acceptance of small-scale deposits and so on Incen-tives can be given for participation in the formal financial sector to helpmobilize savings of remittance recipients and other potential small-scalecustomers Steps to encourage use of remittance funds for private produc-tive investments will channel these funds into capital accumulation andaway from short-term consumption Well-defined legal and regulatory frame-works will help build confidence of remitters to make productive invest-ments and lower risks of losing their investments Many of these stepswould have the side benefit of mobilizing all forms of small-scale savingsand investments and this micro-finance has been shown to facilitate broad-based growth (see Chapter 11)

See Samuel Munzele Maimbo and Dilip Ratha Remittances Development Im-

pact and Future Prospects (Washington DC World Bank 2005)

over the (present) value of repayments calculated with a 10 percentinterest rate

Trends in ODA amounts are shown in Table 19-2 In the early 1960sUS foreign aid was more than half of all foreign aid US assistancethen declined while others expanded their aid programs such that bythe 1990s the United States was giving only about one-sixth of the glo-bal aid total In the most recent decade ODA from both the UnitedStates and other donors has grown again peaking in 2005

Development Assistance ProgramsModern foreign aid programs began after World War II with recoveryassistance provided by the United States to war-torn Western Europeand East Asia A wider US development assistance program grew outof President Harry S Trumanrsquos inaugural address of January 20 1949

399

TABLE 19-2 UNITED STATES and WORLD OFFICIALDEVELOPMENT ASSISTANCE (ODA) 1960ndash2007

(US $millions 2000)

Year Total ODA US ODA US as Total

1960 22256 13137 5901965 28879 17904 6201970 24835 11665 4701975 35514 11150 314

1980 49248 13420 2721985 41845 13683 3271990 65578 14108 2151995 64351 8045 125

2000 53749 9955 1852001 52423 11429 2182002 58297 13290 2282003 69065 16320 236

2004 79432 19705 2482005 94762 24722 2612006 89539 20188 2252007 86518 18214 211

Source OECD database Development Cooperation Report 2008

Truman called for a ldquobold new program for making the benefits of sci-entific advances and industrial progress available for the improvementand growth of underdeveloped areardquo7 The program provided techni-cal assistance to Taiwan South Korea and other countries in SoutheastAsia the Middle East and the less-developed countries of Europe Theprogram was followed by other programs that were consolidated in1961 to form the US Agency for International Development (USAID)USAID remains the principal development assistance agency of theUnited States Government8

Other donor countries also have development assistance effortsand have similar agencies leading their foreign aid programs such asthe Japan International Cooperation Agency (JICA) the UK Depart-ment for International Development (DFID) and the Canadian Inter-national Development Agency (CIDA) During the 1950s assistance was

7 Harry S Truman ldquoInaugural Address of the Presidentrdquo Department of State Bulle-tin 33 Washington DC January 1949 p 125

8 See Elizabeth Morrison and Randall B Purcell Players and Issues in US Foreign Aid(West Hartford Conn Kumarian Press 1988) for additional historical details


400


extended by the United Kingdom France the Netherlands and Bel-gium to their former colonies The list of donors grew during the 1960sand now includes most members of OECD and many members of theOrganization of Petroleum Exporting Countries (OPEC)9 Even thoughthe United States gives more ODA than any other country in recentyears it has ranked at or near the bottom among OECD countries interms of the ratio of ODA to GNP a rough measure of the ability toldquoaffordrdquo aid In 2003 it gave 015 percent while the weighted averageacross all OECD countries was 025 percent and simple average was041 percent In March 2002 the OECD countries pledged to contribute07 percent of their GNP to ODA as a means of achieving the UnitedNations Millennium Goals However few countries have achieved thatgoal

The actual content of foreign assistance programs varies widelyover time and across donors In the last decade the biggest area of em-phasis for US assistance has been on improving governance institu-tions in developing countries This area received very little aid in the1970s but grew rapidly beginning in the 1980s The second-biggest areais now population and reproductive health which includes programsfor HIVAIDS prevention Emergency response programs are the third-largest area followed by debt forgiveness programs Food aid was thelargest area of focus in the 1970s and remained the largest in the 1980sbut has since fallen The Agriculture Forestry and Fishery sector wasthe second largest sector in the 1970s and 1980s but is now the seventhlargest sector Foreign assistance to agriculture includes such diversecomponents as aid used for agricultural research and extension irriga-tion projects rural roads agricultural education and training floodcontrol projects health improvement programs integrated rural de-velopment projects and agricultural policy assistance Comparing theaid allocations of the United States with those of all other donors re-veals that other donors place greater emphasis on aid to education anddebt reduction

Not all development assistance is administered through govern-ment agencies Governments sometimes contract for aid deliverythrough nonprofit nongovernmental organizations (NGOs) which areoften also supported by private charitable donations and commercial

9 OPEC is a group of countries devoted to seeking agreement among themselves re-garding selling prices and other issues related to oil exports OPEC members in-clude Algeria Ecuador Gabon Indonesia Iran Iraq Kuwait Libya Nigeria QatarSaudi Arabia the United Arab Emirates and Venezuela

401

activities10 Several of the largest nonprofit NGOs have religious affili-ations such as Catholic Relief Services or Lutheran World Relief thebiggest of these is a non-denominational Christian organization WorldVision International whose operations in 2008 involved more than $18billion in revenue plus in-kind donations valued at more than $700million11 Most NGOs specialize in specific areas For example the In-ternational Committee of the Red Cross and Doctors without Bordersspecialize in the health sector while Heifer International specializes inanimal agriculture Some NGOs have major advocacy programs suchas Oxfam and Bread for the World

NGOs differ widely in their sources of revenue For example theBangladesh Rural Advancement Committee (BRAC) is a large NGOproviding microfinance and other commercial services In 2008 BRACreported total expenditures of $535 million of which only 27 percentwas donor funding12 Development assistance can be channeled throughfor-profit firms as well as NGOs The use of private contractors to de-liver foreign aid services is particularly important for the United Stateswhere firms routinely bid for contracts from USAID and other govern-ment agencies on a commercial basis

Although most foreign aid funding comes from governments pri-vate philanthropy also plays an important role in international devel-opment The Rockefeller Foundation and other donor organizationsmade key contributions throughout the 20th century In the 1990s large-scale philanthropy by individuals such as George Soros and Ted Turnerbecame important followed by major grants from Bill and MelindaGates and from Warren Buffett whose combined grant making con-tributed over $12 billion for global health and over $300 million forglobal development in 200713 These and countless other acts of indi-vidual generosity alongside the even larger taxpayer-funded programscreate many opportunities to overcome past failings and meet new chal-lenges Managing aid in a cost-effective manner however is still a sig-nificant challenge

10 A detailed analysis of NGOs in US foreign aid is provided by Rachel McCleary andRobert J Barro ldquoPrivate Voluntary Organizations Engaged in International Assis-tance 1939ndash2004rdquo Nonprofit and Voluntary Sector Quarterly vol 37 no 3 (Septem-ber 2008) pp 512ndash36

11 World Vision International 2008 Annual Review Available online at wwwwviorg12 BRAC BRAC at a Glance March 2009 Available online at wwwbracnet13 Bill and Melinda Gates Foundation Annual Report 2007 which is available online at

wwwgatesfoundationorg


402


Multilateral Assistance ProgramsWhile much aid is bilateral or country-to-country a second approachto giving and managing aid is for multiple donors to combine theirresources through multilateral organizations in which donated fundsare pooled and managed for a common purpose Combining funds helpsdonors to leverage their contributions and obtain access to specializedprofessional staff and impartial management

The leading multilateral organization for international develop-ment is the World Bank which was created in 1944 Unlike other devel-opment agencies the Bank does not disburse donor funds as grants mdashand unlike other banks it does not take deposits Instead the WorldBank uses donor contributions to guarantee the repayment of fundsborrowed from investors and it then lends at low interest rates to de-veloping countries The World Bank has more than 180 country mem-bers and consists of three major arms that together represent the largestsource of long-term multilateral economic development assistance Thefirst arm the International Bank for Reconstruction and Development(IBRD) established in 1945 makes long-term loans at interest rates re-lated to its own cost of borrowing mostly for large-scale projects Thesecond arm the International Development Association (IDA) estab-lished in 1960 uses profits on the IBRD loans and other funds to subsi-dize loans to the poorest countries Loans from IDA have long repay-ment periods and concessional interest rates As of 2008ndash09 the opera-tional cutoff for eligibility for a country to borrow on these terms wasabout $1000 per person per year in gross national income The thirdarm the International Finance Corporation (IFC) is a profit-makingenterprise and is funded by capital from its member countries It makesloans to the private sector to mixed (publicprivate) enterprises andto government-owned agencies that channel financial assistance to theprivate sector Two other arms of the World Bank are the MultilateralInvestment Guarantee Association (MIGA) and the International Cen-tre for the Settlement of Investment Disputes

In addition to the World Bank there is a set of regional develop-ment banks for Latin America the Caribbean Asia Africa and EasternEurope These banks operate in a similar way to the World Bank buton a smaller scale The World Bank is also complemented by the Inter-national Monetary Fund (IMF) a sister organization with a much smallerstaff whose purpose is to make short-term emergency loans for macro-economic stabilization as opposed to the long-term development ob-jectives of the multilateral banks The World Bank and IMF are themajor multilateral sources of development funding but large numbers

403

of technical staff provide assistance through the other UN agenciesdescribed in Box 19-2

Effects of Foreign AssistanceThe economic effects of development assistance on recipients are theregular subject of debate in the popular press and among policy mak-ers The effects of aid can be assessed at the project the sector or thenational levels At the project level rates of return have been calculatedfor individual investments such as roads schools or agricultural re-search These calculations typically yield high returns for example the


BOX 19-2MAJOR UNITED NATIONS AGENCIES

for FINANCIAL and TECHNICAL ASSISTANCE to DEVELOPING COUNTRIES

The United Nations Development Programme (UNDP) is the centralfunding and coordinating mechanism within the United Nations for techni-cal assistance to developing countries The United Nations Fund for Popu-lation Activities (UNFPA) helps countries gather demographic informationundertake family planning projects and formulate population policies andprograms

The United Nations Childrenrsquos Fund (UNICEF) provides technicaland financial assistance to developing countries for programs that benefitchildren and for emergency relief for mothers and children

The purpose of the Food and Agriculture Organization (FAO) is toraise nutrition levels and standards of living by improving the productionand distribution of food and other commodities derived from farms fisher-ies and forests It also helps countries with food emergencies

The World Food Programmersquos (WFP) purpose is to stimulate eco-nomic and social development through the use of food aid and to provideemergency food relief

The World Health Organization (WHO) conducts immunization cam-paigns promotes and administers research and provides technical assis-tance to improve health systems in developing countries

The United Nations Education Scientific and Cultural Organiza-tion (UNESCO) promotes international intellectual cooperation in educa-tion science culture and communications

The UNDP UNFPA WFP and UNICEF are funded through voluntarycontributions public and private while FAO WHO and UNESCO arefunded primarily through assessments on member nations with some ad-ditional voluntary contributions and other sources of funds

Source Details on UN agencies are provided at wwwunorg

404


World Bankrsquos independent evaluation group estimated the real rate ofreturn for each of 396 projects that ended between 1995 and 2000 andfound an average return of 22 percent per year14 This payoff is muchhigher than the interest paid to borrow these funds which suggeststhat increased lending for similar investments would raise total eco-nomic growth rates

Given the high rates of return to many aid projects questions areraised about why private lending has not been more forthcoming orwhy concessional loans are needed An important part of the answer isthat returns to aid are spread among the recipient population in waysthat a private company could not capture to repay its investors Forexample aid that helps a small child avoid malnutrition or attend schoolcan generate benefits far in excess of its cost but those benefits cannotbe seized by a lender Indeed aid is most effective when it focuses onprecisely these kinds of public services which will not be provided byprivate firms The developing countryrsquos own governments cannot pro-vide enough of these public goods because they lack the tax base oradministrative capacity to finance them from either current revenuesor to repay its own loans As a result public-sector development assis-tance from richer to poorer countries has an important role to play inmaking the world economy more efficient as well as more equitable

At the sector or national levels development assistance can aug-ment domestic savings help provide foreign exchange and minimizeadverse impacts of needed policy reforms These effects can stimulategrowth Many studies have attempted to assess the impact of develop-ment assistance at the national level as it affects savings investment orgrowth Generally the results have been positive but in many casesinconclusive15 The fundamental problem is that aid typically flows tocountries in trouble and so is usually associated with bad economicoutcomes even though without aid the outcome might have been worsePoor countries face many different kinds of problems from natural di-sasters and disease to wars and corruption A widely-cited view sug-gests that aid has positive effects on growth only in countries with good

14 World Bank Annual Review of Development Effectiveness 2000 supplement Table 13aAvailable online at wwwworldbankorg

15 For more details see Constantine Michalopoulos and Vasant Sukhatme ldquoThe Im-pact of Development Assistance Review of Quantitative Evidencerdquo in AID andDevelopment edAnne O Krueger Constantine Michalopoulos and Vernon WRuttan (Baltimore Md Johns Hopkins University Press) 1989) chapter 7

405

fiscal monetary and trade policies but recent studies suggest that aidhas helped even in countries with weak governments16

The small size of aid relative to other capital sources as describedabove undoubtedly has contributed to many of the inconclusive find-ings about the effects of aid on growth It is also difficult to measure theeffects of aid without breaking it down into its different types and thedifferent reasons for which it is given For example aid for infrastruc-ture may have different impacts on growth than aid for policy reformor for emergency food relief Emergency food relief programs may bevery effective at reducing hunger and human suffering associated withshort-term problems but their effects on aggregate growth may be hardto measure

Despite a relatively weak link between aid and aggregate economicgrowth for reasons outlined above aid has helped reduce poverty andimproved the quality of life of the poor Targeted aid has helped eradi-cate smallpox put polio on the brink of eradication reduced death fromdiarrheal diseases and reduced the incidence and severity of many ill-nesses17 These results will over time contribute to economic growthand development but their effects are indirect and hard to measure

Few studies have attempted to evaluate the effects of developmentassistance to the agricultural sector One study for 98 countries did finda positive effect of foreign assistance to agriculture from 1975 to 1985particularly in Asia However the effects of aid to agriculture in LatinAmerica and the Middle East were non-significant18 Investment in re-search and dissemination of new technologies may be among the mosteffective kinds of aid for reducing poverty especially in Africa wherethe level of such investment has been lowest and where rural poverty isparticularly severe19

16 See Craig Burnside and David Dollar ldquoAid Policies and Growthrdquo American Eco-nomic Review vol 90 (September 2000) pp 775ndash86 and Carl-Johan Dalgaard HenrikHansen and Finn Tarp ldquoOn The Empirics of Foreign Aid and Growthrdquo The Eco-nomic Journal vol 114 no 496 (June 2004) pp F191ndashF216

17 See Jeffrey Sachs The End of Poverty (New York Penguin Press 2005) Joseph StiglitzldquoOverseas Aid is Money Well Spentrdquo Financial Times April 14 2000 p 20 andShalendra Sharma ldquoThe Truth About Foreign Aidrdquo Challenge (July-August 2005)pp 11ndash25

18 See George W Norton Jaime Ortiz and Philip G Pardey ldquoThe Impact of ForeignAssistance on Agricultural Growthrdquo Economic Development and Cultural Change vol40 (July 1992) pp 775ndash86

19 See Colin Thirtle Lin Lin and Jenifer Piesse ldquoThe Impact of Research-Led Agricul-tural Productivity Growth on Poverty Reduction in Africa Asia and Latin AmericardquoWorld Development 31 vol 12 (December 2003) pp 1959ndash75


406


Effects on DonorsMany donor countries believe that development assistance is effectivein stimulating growth in developing countries but ask whether the ef-fects on their own countries are negative In other words they questionwhether their economic self-interest is served by aid For example farmgroups and the farm press in the United States frequently express con-cern that foreign aid may be generating foreign competition Severalstudies have assessed whether foreign aid to agriculture does indeedhurt US farmers These studies have found that for particular com-modities in particular countries at particular stages of developmentforeign competition is increased as a result of aid However they alsohave found that agriculture as a whole in donor countries is helped byforeign aid to agriculture in developing countries20

The reason farmers in donor countries often benefit from aid toagriculture in developing countries is that agricultural growth in LDCsincreases incomes and these incomes in turn stimulate food demandMiddle-income countries particularly still have relatively high popu-lation growth rates and high income elasticities of demand for foodDemands shift toward higher-quality grains and livestock products asincomes rise Consequently when agricultural production rises in thesecountries if domestic economic policies permit that production growthto stimulate other sectors of the economy the result is an expansion infood demand that must be met partially through food imports Of coursewhen countries eventually reach higher income status their growth infood demand slows If and when most of the currently developing coun-tries reach that status trade will be governed by comparative advan-tage and trade-distorting policies Development assistance to agricul-ture will no longer be an issue

In summary while empirical evidence is not always conclusiveabout the effects of development assistance in general or to agriculturein particular it appears that positive but modest gains are likely forboth recipients and donors It is unlikely that large gains will be real-ized except in a few small countries because aid usually represents asmall portion of ODA

20 See for example Alain de Janvry Elisabeth Sadoulet and T Kelley White ldquoForeignAidrsquos Effect on U S Farm Exportsrdquo U S Department of Agriculture Economic Re-search Service Foreign Agricultural Economic Report Number 238 WashingtonDC November 1989 and James P Houck ldquoLink Between Agricultural Assistanceand Agricultural Traderdquo Agricultural Economics vol 2 (October 1988) pp 158ndash66

407

FOOD AIDFood aid has been an important and controversial dimension of foreignassistance since the mid-1950s Its importance relative to other kinds ofaid has fallen over time but it is still a significant component of USforeign assistance The United States has been the largest source of foodaid since the enactment of the Agricultural Trade Development andAssistance Act of 1954 commonly referred to as Public Law (PL) 480Food aid once represented about one-half of U S grain exports but inrecent years it has declined to a small fraction of those exports

The role and effects of food aid have been controversial because ofits many purposes While food aid fulfills a humanitarian and develop-ment mission it also provides a means for donor countries to disposeof surplus commodities and to develop new markets As with any for-eign aid food aid serves the foreign policy objectives of donors Whilethis multiplicity of objectives has added instability over time to foodaid allocations it also has strengthened the political support for main-taining food-aid programs within the donor countries

Critics of food aid have argued among other things that unre-stricted cash donations would be preferable to food While it is clearthat recipients would prefer cash many donors treat food aid as anaddition to rather than a component of their economic assistance It ishighly unlikely that donor budgets would be expanded by the value offood aid if the latter were eliminated

History of Food AidThe history of food aid to developing countries is marked by shiftingemphases on its multiple objectives During the period of 1959 to 1965the United States and Canada were particularly concerned about dis-posal of farm surpluses developing markets for farm products andproviding emergency food relief Most of the aid provided during thisperiod was in grain but several other products were given includingtobacco In 1961 an amendment was added to PL 480 to permit foodto be used for economic development instead of being restricted toemergency relief Improved export markets led by demand growth indeveloping countries reinforced the objective that food aid helps de-velop markets

The era from 1966 to 1972 was a period of heavy use of food aid foremergency relief particularly in drought-stricken areas of South AsiaSelf-help of recipients also was promoted during this period The Euro-pean Community and Canada increased their shipments of food aidfor emergency relief in this period The 1966 to 1972 period might becalled the idealistic era of food aid


408


Food aid helped alleviate hunger in Ethiopia during the 1980s

Unfortunately any idealism with respect to food aid programswas pretty much destroyed by the cutbacks in food aid that followedfood price increases in 1972 to 1975 The United States had depleted itsgrain surplus by exporting commercially to the Soviet Union and othercountries From 1972 to 1973 US commercial grain exports doubledand the volume of food aid fell in 1974 to its lowest level since the en-actment of PL 480 Furthermore during this period half of all USfood aid went to South Vietnam and Cambodia as a result of US in-volvement in those countries

In 1975 the US Congress instituted more humanitarian and de-velopment criteria for receiving food aid by passing the InternationalDevelopment and Food Assistance Act (see Box 19-3) This legislationcalled for increased food aid to the poorest countries The remainder ofthe 1970s also saw increasing food aid quantities from EC countriesHowever the use of food aid for political purposes also increased after1975 For example US food aid to Bangladesh declined from 115 mil-lion tons in 1975 to 034 million tons in 1985 while food aid to Egyptincreased from 058 million tons to 200 million This increase to Egyptwas directly linked to the Camp David Peace Agreement signed withIsrael in 1979 Food aid quantities increased in the mid-1980s in responseto severe drought problems in Ethiopia the Sudan and otherSubshySaharan African countries In the 1960s most food aid went to Asiaand Latin America By the mid-1980s Sub-Saharan Africa was absorb-ing as much food aid as the much more populous Asia

409

BOX 19-3THE UNITED STATES PL 480 FOOD AID PROGRAM

Since 1954 most US food aid activities have been coordinated underPL 480 Numerous amendments and extension have been added to theoriginal act but currently the major provisions fall under the three followingtitles

Title I mdash Was formerly the most important component of PL 480 butby the early 2000s it had shrunk to about $100 million per year comparedto more than $50 billion in agricultural exports from the US Recipientgovernments buy grain on credit with interest rates of 3 percent or lessover 20 to 40 years repayable in local currency These governments cansell the grain internally and use the profits for development The lowerinterest rates and long repayment period mean that almost 70 percent ofthe food aid loan is a grant

Title II mdash involves gifts of food for emergency relief and for economicdevelopment in 1991 it surpassed Title I as PL 480rsquos largest componentnow accounting for more than 85 percent of the program The food is givento and distributed by private agencies such as CARE who use the food forinfant feeding programs and for mother and child health programs in addi-tion to emergency distribution In a recent year about 70 percent of CARErsquosbudget was PL 480 Shipping and labor are paid for by the US govern-ment Food given under Title II also is used in food-for-work programs

Title III mdash involved using food aid in government-to-government pro-grams to support economic development but has not received fundingsince 2001

Other US food aid programs exist but food aid is now dwarfed byagricultural export credit programs which support commercial grain ex-ports

Types of Food Aid Programs TodayEmergency food aid grabs most of the headlines as it relieves crisesassociated with droughts in Ethiopia the Sudan and North Korea andflooding in Bangladesh and other parts of Asia Emergency food aidhas also played a significant role in feeding refugees from AfghanistanIraq and other countries in recent years This short-term food aid isessential for reducing acute hunger problems The possibilities of us-ing food aid to foster long-term development however are more closelylinked to program or project food aid

Program food aid is in many respects similar to more generalfinancial assistance as it provides currency to buy imports in this casefood that can be sold or otherwise distributed in the domestic market


410


This aid fosters the development of marketing linkages with the do-nors it helps the recipients save foreign exchange and the funds gener-ated by the sales can be used for development Some donors participatein determining how the funds generated by commodity sales are usedDonors may insist that funds be used for investments in the agricul-tural sector or to support specific policy changes affecting agricultureSome of the recent food aid shipments to Sub-Saharan African coun-tries were intended to soften the adjustments to structural changes intheir economies

Project food aid is aimed at meeting specific development objec-tives Projects tend to be multiyear to be targeted at nutritionally vul-nerable individuals or groups and may involve food in exchange forwork on the project Donor and recipient countries agree on who willbe targeted by the project the amount of food each individual receivesthe delivery system for the food and the design implementation andmonitoring of the project activities21 Most of the projects involve therural sector and can vary in size from a few hundred thousand dollarsto $100 million or more Food aid projects often involve forestry devel-opment soil conservation and watershed management resettlementprojects training development of irrigation works and constructionand maintenance of rural roads

Effects of Food AidThe positive and negative effects of food aid on recipient countries havebeen studied and debated for many years On the positive side foodprovides real resources that can be used to expand investment andemployment Food aid can have a disproportionate but positive effecton disadvantaged groups notably by supporting specific nutrition orfood-for-work projects or by providing food to the poor for free or atsubsidized prices Food can be used to help recipient governments sup-port storage and stabilization schemes to provide a small buffer againstpoor production years

Food aid also can have adverse effects on the recipients Thesepotential adverse effects of food aid can occur in a number of ways (1)disincentive effects on local agricultural production through reducedprices because of greater supply (2) dependency effects because thegovernment can substitute food aid for agricultural development pro-grams and (3) the uncertainty of food aid quantities from year to year

21 See Robert Chase ldquoCommodity Aid for Agricultural Developmentrdquo in Trade Aidand Policy Reform ed Colleen Roberts (Washington DC World Bank 1988) pp199ndash204

411

The disincentive issue has been examined empirically in severalstudies22 In theory additional supplies could depress food prices anddiscourage production Some empirical studies have found this to bethe case but other studies have found the opposite The disincentiveeffect is minimized if food aid is given or sold to those who otherwisecould not afford the food Transferring food is like transferring incomeThe quantity of the aid compared to the countryrsquos overall food produc-tion is important For example it appears that there has been a disin-centive effect in Egypt due to the large quantities of aid shipped but itis extremely difficult to sort out the impact of food aid from the manypolicy-induced distortions Even when food aid reduces prices it is likelyto have a beneficial effect on the poor who generally purchase morefood grains than they sell23

The idea that food aid creates dependency has not been examinedas frequently Food aid is no different from other aid in that by provid-ing resources it may lead to less effort to raise revenues domesticallyor to promote agricultural development Conditions are usually placedby donors on program aid that minimize this possibility A second partof the dependency argument is that over the long run food aid leads tomore food imports and changes in preferences away from domesticallyproduced foods Some evidence shows that this preference effect maybe occurring although it is difficult to separate changes induced byfood aid from those that occur because of income growth and othertrade

Food aid can be used in a positive way by recipients to furtherboth agricultural and overall economic development Emergency foodaid will always be variable and it can play a major life-saving role dur-ing short-term emergencies It appears that the potential positive de-velopment role of food aid has not been fully exploited although someefforts are under way to improve its development contribution

Most donor countries find public opinion is generally supportiveof food aid especially when it is used in visible programs to preventstarvation The future however for food aid is uncertain due to budgettightening in donor countries reduced price supports for agricultureas a part of opening of global markets and questions about its effec-tiveness as a development tool Stronger multi-year commitments

22 See S T Maxwell and H W Singer ldquoFood Aid to Developing Countries A SurveyrdquoWorld Development vol 7 (1979) pp 223ndash47 for a summary of results of 21 studies

23 See James Levinsohn and Margaret MacMillian ldquoDoes Food Aid Harm the PoorHousehold Evidence from Ethiopiardquo National Bureau of Economic Research IncNBER Working Papers 11048 (2005)


412


Food aid is used in Kenya to help pay labor for road construction

are certainly needed if food aid is to be more effective in promotingdevelopment

SUMMARYForeign development assistance in support of agriculture in develop-ing countries has been substantial taken many forms and generatedconsiderable debate The rationale for foreign aid rests on various po-litical and economic interests as well as humanitarian grounds so aiddoes not always go to where need is greatest Aid may be channeledthrough government agencies NGOs or private contractors and comesmainly from donor-country governments but also from charitable do-nations and philanthropies Some aid is a simple grant but much of itcomes as loans at below-market interest rates Foreign aid to agricul-ture includes aid for agricultural research and extension irrigationprojects rural roads agricultural policy assistance and many otheritems

The United States is the largest donor country but the share oftotal ODA coming from the United States has declined over time TheUnited States has been particularly active in giving food aid whichprovides emergency relief in times of severe shortage and supportsspecific development projects and programs Food aid also provides ameans for donor countries to dispose of surpluses develop new mar-kets and pursue foreign policy objectives

413

IMPORTANT TERMS and CONCEPTSBilateral aid NongovernmentalConcessional interest rates organizationEconomic self-interest Official developmentFood aid assistanceForeign development assistance Point Four ProgramInternational Bank for Reconstruction Public Law 480 and Development US Agency for InternationalInternational Development Association DevelopmentInternational Finance Corporation The World BankMultilateral aid

Looking AheadThis chapter concludes the section of the book concerned with macro-economic and international issues affecting development The bookconcludes in the next chapter with a discussion of how the various com-ponents required for agricultural development can be combined in anoverall strategy An assessment of future development prospects is pro-vided and suggestions are made for how you as individuals can con-tribute to solving the world food-poverty-population problem

QUESTIONS for DISCUSSION1 What is the rationale for foreign development assistance2 What are the major types of foreign development assistance3 What are some of the major effects of foreign development assis-

tance on recipients and donors4 Distinguish between bilateral and multilateral aid5 Give several examples of foreign aid to agriculture6 How do NGOs differ from official sources of foreign development

assistance7 What are the three major arms of the World Bank and how do they

differ8 Which country is currently the largest bilateral donor of foreign

aid9 Why might foreign development assistance help US farmers10 What are the objectives of food aid11 What is the case for and against food aid12 How have food aid programs changed over time13 What is the difference between program and project food aid14 How do the three Titles of PL 480 differ


414

RECOMMENDED READINGSCollier Paul The Bottom Billion (New York Oxford University Press 2008)Easterly William The Elusive Quest for Growth (Cambridge MIT Press

2002)Lancaster Carol Foreign Aid Diplomacy Development Domestic Politics (Chi-

cago University of Chicago Press 2007)Riddell Roger Does Foreign Aid Really Work (Oxford Oxford University

Press 2007)Sachs Jeffrey The End of Poverty (New York Penguin 2005) especially

chapter 13


415

CHAPTER 20

Lessons and PerspectivesldquoProgress in reducing hunger has been uneven across regions andcountrieshellipreducing hunger and malnutrition will require strength-ening governance of the food and agriculture system at the globalcountry and local levelshellipscaling up public investment for agricul-tural and rural growth taking targeted steps to improve nutrition andhealth and creating an effective global system for preventing andmitigating disastershellipWe must push ourselves even further to de-velop and implement solutions and policies to achieve food andnutrition security for the poorest of the poor and those most afflictedby hungerrdquo mdash Joachim von Braun1

THIS CHAPTER1 Summarizes how the various components required for agricultural

development can be combined to increase agricultural productivityand stimulate economic growth and development

2 Discusses how principles discussed in this book can be used toassess future prospects for agricultural development in developingcountries

3 Suggests ways that individuals can contribute to reducing the food-poverty-population problem

AN INTEGRATED APPROACH to AGRICULTURALDEVELOPMENTIt is easy to be pessimistic about prospects for solving poverty and hun-ger problems in developing countries Many countries in Sub-SaharanAfrica have stagnated for decades and disease problems such as HIVAIDS have made a bad situation there worse Latin American countries

1 Joachim von Braun Director General International Food Policy Research Institutefrom remarks prepared for the CGIAR Annual General Meeting Marrakech Mo-rocco December 6 2005

416


have suffered periodic setbacks on the path to development and haveonly improved gradually over time Several Asian countries have grownrapidly over the past 30 years but population growth remains rapid inmany already densely-populated Asian countries while water becomesscarcer Concerns for the global environment have focused attention onthe growing problem of resource degradation especially of soils in alldeveloping regions Recent increases in energy prices have placed coststress on agricultural producers while commodity price volatility hasmade planning more difficult and harmed many consumers in devel-oping countries

Governments have been seeking policy solutions to these and otherproblems Over the past several years numerous policy prescriptionshave been suggested yet none has been universally successful Importsubstitution policies domestic and trade policy liberalization land re-form foreign aid education privatization investment in large-scaleindustries integrated rural development projects farming-systems re-search and many other solutions have been offered Some of these sug-gestions have contributed to the development process others have notBlame for slow progress often is laid at the doorstep of the developedcountries sometimes with justification

While economic development has been painfully slow and uneven(witness the rise in 2008ndash09) there is certainly room for guarded opti-mism Globally the percentage of people living in poverty fell in mostyears from the 1960s until 2009 as did the absolute number of mal-nourished people despite the growth in population While poverty andmalnutrition rose in 2008ndash09 due to a sharp increase in food prices anda global recession they may again fall as food prices stabilize and eco-nomic growth resumes

Several lessons have been learned about what it takes to stimulateagricultural and overall economic development One of these lessons isthat there are no panaceas Development requires a mix of technicaland institutional changes that work best in combination The exact mixvaries between countries and policies appropriate for one environmentmay not necessarily be so for another A second lesson is that develop-ment takes time and many of the investments necessary for long-runsustainable development have impacts long after they have been imple-mented This time lag requires patience and political stability A thirdlesson is that developing countries are primarily responsible for theirown development but interdependence in trade and capital flows meansthat developed-country policies can assist or retard that developmentA few years ago the United Nations and its member states set a seriesof millennium development goals for 2015 that would significantly

417


reduce poverty hunger and disease while promoting education gen-der equality and environmental sustainability2 Some progress has beenmade toward achieving those goals although their total attainmentseems unlikely

In Economics of Agricultural Development you have examined thedimensions of world food-income-population problems (see top of Fig-ure 20-1) You have considered the interconnections among these prob-lems and their linkages to health nutrition literacy and the environ-ment There is enough total food in the world at the moment but hun-ger is caused by food price volatility and by distributional problemsthat are in many cases related to poverty There are short-term foodcrises and long-term or chronic malnutrition You have considered eco-nomic development theories the role of agriculture in those theoriesand the nature of existing agricultural systems You have learned thatdeveloping-country farmers tend to be relatively efficient at what theydo but have low productivity because of their limited access to re-sources their existing technological and institutional environments andthe pervasive risks they face Having learned something about the di-mensions of the problem the role of agriculture in economic develop-ment theories and the nature of agriculture in developing countriesyou then examined several components of the development processLetrsquos review below the interrelationships among those components andassess where the need is greatest for additional insights with respect tothe development process

Technical and Institutional Change in AgricultureIn the 1950s many development experts felt that the keys to agricul-tural development were capital investment and the transfer of tech-nologies from more-developed countries By the 1960s and 1970s it wasclear that technology transfers and capital investment had a role to playbut that many other factors were equally or more important Differ-ences in resource bases across countries meant that indigenous researchand extension were vitally important Education was required if coun-tries were to produce adapt transfer and receive new technologies Bythe 1990s countries that were successful in agricultural developmenthad put in place a research- and technology-transfer system that in-cluded (1) indigenous agricultural research stations and educational

2 See Jeffrey Sachs Investing in Development A Practical Plan to Achieve the MillenniumDevelopment Goals the Millennium Project (London Earthscan publishing 2005)

418


Figure 20-1 The hunger problem and the solution process

institutions (2) a mechanism for linking those stations to on-farm re-search and testing and (3) ties between the national research systemand the international agricultural research and training network

As important as indigenous capacity for agricultural research andextension is the last several years have also demonstrated the need fora whole series of policy or institutional reforms related to the agricul-tural sector These reforms have been proven important not only

419


because of their influence on production incentives and the distribu-tion of economic gains but also because of their influence on the typesof technologies produced and adopted Land reform improved creditpolicies marketing system development nondiscriminatory pricingpolicies rules on intellectual property protection efficient means ofmanaging risks and incentive systems to reduce environmental exter-nalities are examples of the institutional changes that may be required

New technologies are not gifts of nature and institutional changesdo not magically appear New technologies require research invest-ments and the levels and types of technologies produced and subse-quently adopted are influenced by changes in relative prices of inputsand outputs Institutional changes also are induced by changes in rela-tive prices and by technical change

The logic of the induced technical and institutional change theo-ries and their apparent empirical verification in several countries par-ticularly in East Asia give cause for optimism However the failure ofmany countries to follow a path of sustained development has forcedeconomists to broaden the induced innovation theory This broadeninghas come by incorporating transactions costs and collective action intothe theory

Transactions costs refer to the costs of information of adjusting afixed-asset base and of negotiating monitoring and enforcing contractsThe fact that information is not perfect and is costly to acquire and thatpeople are willing to exploit their situation at the expense of others hasreceived particular attention If one group has greater access to infor-mation than another that group can act collectively to press for poli-cies or new technologies that benefit it at the expense of others

If a small but wealthy elite with large landholdings finds it cheaperto acquire information and act collectively it may press for technicaland institutional changes for personal benefit at the expense of themasses The elite may press for changes that not only distribute incomein its favor but reduce the agricultural growth rate because the result-ing technologies and policies may not be appropriate for the resourcebase in the country

Factors that can help reduce transactions costs are those factorsthat reduce information costs Improved roads and communicationsinfrastructure are examples new communications technologies are hav-ing dramatic impacts even in remote areas More widespread access tomarket information is allowing producers to make decisions that in-crease economic efficiency Widespread access to education is also criti-cal as education allows people to better use information Land reformcan help in many countries as can institutional change to enhance

420


contracting to improve the legal infrastructure and to provide certaintypes of regulations3 Freer markets to provide efficient price signals toindividual farmers also should help

Markets are generally held to be the best means of transmittingsignals to actors In developing countries however market imperfec-tions due to transactions costs unequal asset distributions and otherfactors are the norm These factors also increase variability in pricesand exacerbate risks for producers and consumers Some governmentinvolvement is legitimate and necessary to reduce these imperfectionsand allow markets to work Government involvement can be justifiedto provide ldquopublic goodsrdquo to create equal access to opportunities andto achieve equity outcomes consistent with societyrsquos wishes

Macroeconomic and International Institutional ChangesIn the 1950s and 1960s (and to some extent before and after) severaleconomists in developing countries recommended policies that dis-couraged agricultural exports and encouraged production of goodsthat would substitute for imports The argument for these policieswas based on potential or perceived exploitation of developing coun-tries by more-developed countries However countries that inte-grated more closely into international markets tended to develop

Young boys in Guatemala

3 For example regulations may be needed to reduce environmental externalities toprovide food safety standards and for other purposes

421


more rapidly than those that closed or isolated their economies Themore rapid development was due in part to the lower level of rent-seeking behavior and corruption as well as the increased efficiencygains from trade and specialization

Some of the countries that discriminated against agricultural tradeencouraged capital-intensive imports causing capital-intensive indus-tries to develop in labor-abundant countries These industries placed adrag on economic development because human resources freed up byincreases in agricultural productivity were under-employed This ten-dency to develop capital-intensive industries may have been inducedin part by transactions costs and collective action but also by a per-ceived need to imitate more-developed countries

For the past 30 years several developing countries have sufferedfrom heavy external indebtedness This problem has forced some coun-tries to reform their policies in ways that are intended to spur longer-run economic growth The debt overhang is so large for some LatinAmerican and African countries however that without debt reductionon the part of those holding the loans development will remain im-peded Official debt can be rescheduled through the Paris Club and bymultilateral organizations Some debt reduction for the lowest-incomeheavily-indebted countries has occurred and more has been promisedHowever commercial debt reduction will only be achieved slowly with-out improved international overshysight to reduce the free rider problemthat currently exists

Continued efforts by developing countries to reduce overvaluedexchange rates and to phase out policies such as export taxes will berequired to stimulate agricultural growth Phasing out export taxeshowever will necessitate new mechanisms for generating governmentrevenues such as land or income taxes Such taxes become somewhatmore feasible as information flows improve in a country New institu-tions will be needed along with increased government responsibilitiesReduced trade restrictions by developed countries as a result of nego-tiations under the auspices of the WTO would also help developingcountries Increased regional economic integration among developingcountries may also play a positive role in some cases

Capital Flows and Foreign AssistanceCapital flows have provided a two-edged sword for many countriesparticularly in Asia and Latin America Capital inflows have helpedstimulate investments and growth particularly in East Asia but haveled to financial crises when outflows occur rapidly over a short periodof time The crisis that spread through East Asia beginning in 1997 had

422


devastating impacts on human welfare and set back progress towarddevelopment in affected countries The world-wide economic crisis thatbegan with the freezing of lending by US and European banks in fall2008 contributed to a deep global recession whose impacts are still be-ing felt Developing countries each must decide upon the appropriatemix of regulations for capital flows fixity of exchange rates and free-dom to adjust macro-economic policies Flawed decisions can lead toeconomic instability and stagnation

Economic development assistance can help relieve short-term foodcrises and can contribute to longer-term development Emergency foodaid is essential for averting famine following natural disasters and ma-jor political upheavals Longer-term financial aid could help to reducethe debt problem in several countries and provide real resources fordevelopment

Aid effectiveness could be improved by longer-term commitmentsand increased donor coordination Less tying of aid to factors such asprocurement from donor sources but increased tying of aid to institu-tional changes that eliminate distortions or reduce transactions costswould help

Coordinated international action has been successful in dealingwith specific development problems International support for agricul-tural research led to productivity increases that enhanced food secu-rity reduced famines in highly populated areas and helped alleviaterural poverty Worldwide immunization efforts coordinated by theWorld Health Organization have significantly reduced deaths due tocommon childhood diseases Concerted efforts to provide food to fam-ine victims have reduced famine mortalities Similar international co-ordination could be effective in reducing debts providing assistancefor policy reforms and for other specific actions Because developmentneeds and the impacts of different interventions vary from country tocountry international actions to promote growth have tended to be lesssuccessful than those used to address specific short-run problems

In summary it is clear that many pieces are needed for a countryto solve its development puzzle Enhanced information flows are vi-tally important for agricultural development More labor-intensive in-dustrial growth is needed in several countries if the employment prob-lem is to be solved

ASSESSING FUTURE PROSPECTSSeveral countries in Asia have grown at relatively rapid rates for al-most three decades (with some short-term financial instability) butmasses of impoverished people still live in Asia Latin American

423


countries that grew in the 1960s and 1970s stagnated in the 1980s andmost of the rsquo90s Most Sub-Saharan African countries have grown veryslowly stagnated or declined for the past 40 years Hunger problemspersist despite increased food production per capita in the world overthe past 50 years Poverty rates have however generally fallen exceptduring 2008ndash09 Environmental problems have grown worse in severalcountries as well What does the future hold for reducing hunger pov-erty population growth and environmental problems Letrsquos considersome of the underlying forces at work

Supply and Demand for FoodThe real price of food in the world trended slightly downward for sev-eral years as supply growth outstripped demand growth Recently realenergy prices have increased raising production costs and incomeshave grown and shifted demands outward in populous countries suchas China and India real world food prices have increased Most ex-perts think that food prices will remain high and volatile through 2010ndash20 although they may not hit the peaks of mid-2008 The major long-run food supply shifters are new technologies and the competition withenergy for use of agricultural resources The major demand shifters arepopulation and income growth As we look to the future populationwill continue to grow but the rate of population growth will fall In-comes have increased rapidly in several Asian countries includingChina with its massive population base Continued income growth islikely Asia has two-thirds of the worldrsquos population and as a regionthe best chance of continued supply increases due to research-inducedtechnical change Food production per capita will likely continue toincrease in Asia but income-based growth in demand is likely to keepfood prices high (Box 20-1) There will be increased diversification awayfrom rice however as diets change with higher incomes In particulardemands for animal proteins are likely to increase with important im-plications for livestock production and marketing systems

In Latin America increased food production per capita is likelybut not at a rapid rate as debt problems continue limiting public in-vestments in agriculture Population growth rates have already declinedfrom their peaks of earlier decades facilitating this per-capita increaseMore urbanization and income growth will have implications for fooddemands and a changing face of marketing and trade in food Overalldemand growth is likely to outstrip supply growth for this region

Unfortunately many Sub-Saharan African countries will continueto experience disease and stagnant per-capita growth in food produc-tion Some increased investments in education and in agricultural

424


research systems have been realized but population growth rates arestill high If small income increases can be realized population growthmay decelerate but environmental problems appear to have alreadydegraded the resource base in parts of the Sahel to the point of reduc-ing productivity AIDS and malaria remain serious health problemsRecently the Gates Foundation has joined other public and private or-ganizations in a concerted attempt to solve these serious health prob-lems but solutions will be difficult and will take time

Institutional ChangesImproved information technologies and infrastructure developmenthave improved information flows in some developing countries These

BOX 20-1THE PROSPECTS for CEREAL TECHNOLOGIES

The spectacular burst in yield potential from new varieties of rice and wheatthat began the Green Revolution has not been repeated Rice yields onexperimental farms have not grown dramatically since the introduction ofIR-8 in 1966 However the difference between yields on the best farmsand the yields on experiment stations has shrunk dramatically since 1970particularly in Asia This reduced difference is due to widespread irrigationhigh application of fertilizer and good management Future gains in riceproduction must come increasingly from rain-fed upland and deep-waterareas unless new biotechnologies provide yield breakthroughs

The prospects for wheat and maize are more optimistic even in theshorter run The Centro de Mejoramiento de Maiz y Trigo (CIMMYT) re-ports a continuing increase in the yield potential of wheat of about onepercent annually Substantial progress has been made toward breeding indisease resistance especially against wheat leaf-rust Yield growth for wheatin less favorable conditions has been less spectacular High-yielding vari-eties for low-rainfall marginal areas are limited and there are virtually nonew varieties for the lowland humid tropics Major break-throughs in theseareas may pave the way for a technology-driven boom in wheat yieldsMaize shows the most promise There is a large gap between experimentstation and farmerrsquos yields and weed control seems to be the critical prob-lem Human-based solutions to weed problems provide opportunities forincreased employment while increasing maize yields

In terms of genetic engineering and other biotechnologies in generalthe outlook is promising but uncertain Many improvements such as in-creased insectdisease and drought resistance are on the horizon butpublic fears about biotechnologies in developed countries have slowed thedevelopment and spread of these technologies in developing countries aswell

425


improvements may create pressures for political and institutionalchanges changes that offer favorable opportunities for developmentReduced transactions costs that result would induce the developmentof technologies that are better suited to the relative resource scarcitiesof the countries More market-oriented policies may continue to createefficiency gains as they have in Asia There is evidence that some gov-ernments in Latin America and Africa have laid the groundwork forthese types of gains as well One factor that has led to food price volatil-ity in recent years has been the small size of food stocks held globallyand in individual countries While it can be inefficient for countries inAfrica to hold large stocks due to storage losses among other factorsevidence seems to indicate that increased holding modest levels of stocksto buffer prices swings may make sense

The willingness of more-developed countries to provide foreignassistance and international institutional changes to help poor coun-tries is constantly in flux Indifference was growing during the 1990samong policy makers in the United States and many other developedcountries The fall of communism in Eastern Europe and the breakupof the Soviet Union a few years ago reduced political pressures on West-ern governments to help developing countries for the purpose of keep-ing those countries out of Soviet influence The heightened focus on theterrorism threat since September 11 2001 has caused many nations tofocus their resources more on countries posing security threats than onattacking more broadly the root causes of poverty and hunger

The relatively wealthy countries of the world must resist isola-tionist temptations Terrorist attacks and threats may help stimulatecountries eventually to seek longer term solutions to problems abroadA long-term goal of promoting democracy and freedom can only beattained through steps to reduce poverty and build economic opportu-nity Many security income hunger and environmental problems re-quire a supra-national decision-making process In order to strengthenthe United Nations agencies that could make these decisions devel-oped countries will need to increase their contributions to official de-velopment assistance

HOW YOU CAN HELPYou as individuals can do a great deal to help solve hunger pov-erty ill health environmental degradation and other developmentproblems Some of you can get involved directly through workingfor grass-roots organizations in developing countries The PeaceCorps is an example in the United States but there are many others Forthose from developed countries spending time living and working in a

426


developing country can greatly improve your understanding of devel-opment problems We are each captive of the pictures in our mind andliving in a developing country provides a more accurate picture of theworld

Getting directly involved in influencing the fortunes of others canbring you a feeling of significance or satisfaction The frustrations ofworking with desperately poor people are many If you are not an opti-mist you may not want to try However if you are adventurous flex-ible and somewhat persistent you may want to consider working at agrass-roots level in a developing country

Some of you can obtain a graduate education to become animalscientists plant breeders plant pathologists entomologists agriculturaleconomists soil scientists microbiologists or some other type of agri-cultural scientist needed to help solve world food income and envi-ronmental problems Employment opportunities exist for rewardingcareers at universities in international agricultural research centersnational research centers and private firms Until the worldrsquos popula-tion stabilizes the battle to keep world food production increasing atroughly 2 to 3 percent per year will continue

Most of you will take very different career paths but the opportu-nity always exists to contribute to solving poverty problems throughfinancial contributions to private voluntary organizations All of youcan strive to keep informed about what is happening in the world

People in developing countries can benefit from grass-roots help

427


outside your state and country You can try to keep politicians informedand let them know that you support foreign assistance contributions tocountries where needs are greatest

SUMMARYIn this chapter but also in the whole book we have stressed the interre-latedness of hunger population and poverty problems There are nopanaceas but a set of interconnected pieces to a development puzzleWe have learned over the years what many of these pieces are Inthis chapter we stressed particularly the importance of enhanced-information flows if broad-based development is to occur Open econo-mies employment-based industrial policies and development policiesthat do not discriminate against agriculture are essential For devel-oped countries now is the time for renewed commitment to findingsolutions to development problems

IMPORTANT TERMS and CONCEPTSAgricultural scientist No panaceaEnhanced information flows Supply and demand shiftersFeeling of significance Supra-national decision-makingGrassroots organization processInterdependence

QUESTIONS for DISCUSSION1 Why might there be room for guarded optimism with respect to

future agricultural and economic development2 Describe the interconnectedness among the pieces that can contrib-

ute to solving the development puzzle3 How has the theory of induced technical and institutional innova-

tion been broadened and why4 What factors can help reduce transactions costs5 Why have relatively open economies grown more rapidly than

relatively closed economics6 What factors will determine the long-run future price of food in the

world7 Why do enhanced information flows offer favorable prospects for

development8 What might you as an individual do to help solve hunger poverty

and other development problems

428


RECOMMENDED READINGPinstrup-Andersen Per and Rajul Pandya-Lorch The Unfinished Agenda

Perspectives on Overcoming Hunger Poverty and Environmental Degrada-tion (Washington DC International Food Policy Research Institute2001)

Runge C Ford Benjamin Senauer Philip G Pardey and Mark WRosegrant Ending Hunger in Our Lifetime Food Security and Globalization(Baltimore Johns Hopkins University Press 2003)

Hunger Task Force Ending Hunger It Can Be Done the Millennium Project(London Earthscan 2005)

429

Glossary of Selected Terms

absolute advantage When one countryrsquos cost of producing a good islower than the cost in other countries

agricultural extension The process of transferring information aboutimproved technologies practices or policies to producers consum-ers or policymakers

agricultural productivity Level of agricultural output per unit of in-put

balance of payments Difference between receipts from all other coun-tries and payments to them including all public and private transac-tions

biased technical change The process of adoption of new means of pro-duction that use one factor more intensively than other factors hold-ing all other things constant

bilateral Two-party or two-country such as aid from one country toanother

biotechnology A set of tools including traditional breeding techniquesthat alter living organisms or parts of organisms to make or modifyproducts improve plants or animals or develop micro-organismsfor specific uses Modern biotechnology includes use of recombinantDNA monoclonal antibodies and novel bio-processing techniquesamong others

birth rates and death rates The number of births or deaths per 1000population in a year

buffer stocks Supplies of a product that are stored and used to moder-ate price fluctuations These stocks are sold during periods of risingprices and purchased when prices fall

capital accumulation Investmentcommon property Property for which the rights of use are shared and

ownership is not private but shared by allcomparative advantage Ability of a country to produce a good or ser-

vice at a lower opportunity cost than another country can The theoryof comparative advantage implies that a country should devote itsresources not to all lines of production but to those it produces mostefficiently

430

concessional Subsidized usually used with respect of interest on loansconsumerproducer surplus Consumer surplus is the area below the

ordinary demand curve and above the price paid it is a measure ofwell-being Producer surplus is the area above the supply curve andbelow the price paid it is a measure of returns to fixed factors ofproduction

debt rescheduling Extending the repayment period for loans alteringinterest rates forgiving part of the principal or some combination ofthe three

demographic transition The historical shift of birth and death ratesfrom high to low levels in a population Death rates usually declinebefore birth rates resulting in rapid population growth during thetransition period

discount rate The value used to determine the present value of futurecash flows arising from a project or an investment

economic development Improvement in the standard of living of anentire population Development requires rising per capita incomeseradication of absolute poverty reduction in inequality over the longterm and increased opportunity of individual choice

economic or structural transformation of an economy The increase inthe size of the nonagricultural sector relative to agriculture that oc-curs in all economies as economic growth occurs

elasticity A measure of the percentage response of one variable (forexample quantity demanded) to a 1 percent change in another vari-able (for example price)

experiment station A center or station at which scientists conduct re-search

external debt Debts owed by the government in one country to credi-tors in another country

externality An economic impact of an activity by an individual or busi-ness on other people for which no compensation is paid Externali-ties may be positive or negative and are often unintentional

foreign assistance or foreign aid Includes financial technical foodand military assistance given by one or several countries to anothercountry This assistance may be given as a grant or subsidized loan

foreign exchange rate The number of units of one currency that it takesto buy a unit of another currency

free rider An individual or business that receives the benefits of theactions of another individual or business without having to pay forthose benefits

free trade area A block of countries that agree to lower or eliminatetariffs and other trade barriers among themselves but each country


431


maintains its own independent trade policy toward nonmember na-tions

fungibility of credit The degree to which money loaned for one pur-pose can be used for another

General Agreement on Tariffs and Trade (GATT) Multilateral agree-ment originally negotiated in 1947 for the reduction of tariffs andother trade barriers The agreement provides a forum for intergov-ernmental tariff negotiations

globalization The increasing integration of economies around theworld particularly through trade and financial flows Also refersto the movement of people and knowledge across internationalborders

Green Revolution The dramatic increases in wheat and rice harveststhat were achieved in the late 1960s primarily in Asia and LatinAmerica following the release of fertilizer- and water-responsivehigh-yielding semi-dwarf varieties of those crops

high-yielding variety Varieties of plants that have been improvedthrough agricultural research so that they yield more per amount ofinput than the traditional varieties

human capital The level of education skills knowledge health andnutrition of an individual or a population

import substitution Actions by a government to restrict imports of acommodity to protect (from international competition) and encour-age domestic production of the good

induced innovation theory A theory that hypothesizes that technicalchange is induced by changes in relative resource endowments andby growth in product demand institutional change is induced bychanges in relative resource endowments and by technical change

institutions Organizations or rules of society Government policiesregulations and legal systems are examples

integrated pest management The coordinated use of biological cul-tural and chemical pest control practices to reduce insects diseasesand weeds The purpose is to control pests in both an economicallyand an ecologically sound manner

intellectual property rights Laws regulating the copying of inven-tions identifying symbols and creative expressions These laws en-compass four separate and distinct types of intangible property mdashpatents trademarks copyrights and trade secrets

international agricultural research centers (IARCs) The set of agri-cultural research centers supported by a group of public and privatefunding sources These centers provide improved technologies andinstitutional arrangements to help developing countries increase their

432


food production Funding is coordinated by the Consultative Groupon International Agricultural Research (CGIAR)

international capital market The transfers of capital (money) amongcountries in response to short- and long-term investment opportuni-ties

international commodity agreement A formal agreement among themajor producing and consuming countries of a commodity that speci-fies a mechanism for stabilizing price An agreement may specifyimport and export quotas for each country

International Monetary Fund (IMF) An international financial insti-tution designed to (1) promote international monetary coordination(2) foster international trade (3) facilitate stabilization of exchangerates (4) develop mechanisms for multilateral transactions betweenmembers and (5) provide resources for enhanced international fi-nancial stability

land reform An attempt to change the land tenure system throughpublic policies

land tenure The rights and patterns of control over landless developed country (developing country) (LDC) Generally refers

to countries in which per capita incomes are below $6000 althougha few countries with higher incomes consider themselves to be lessdeveloped or developing

market failure When markets fail to efficiently organize production orallocate goods in a way that maximizes social welfare

micro-finance Small-scale provision of credit savings and insuranceservices usually to the very poor

moneylender An informal lender whose business it is to lend moneyto borrowers usually at high interest with little or no collateral orpaperwork

money supply Currency plus money that can be easily withdrawn fromchecking or savings accounts

monopoly power When a single seller or united group of sellers hasthe power to alter the market price as opposed to having to just ac-cept the market price

monopsony A market with a single buyermultilateral Refers to many countries as opposed to two countries (bi-

lateral) Examples are multilateral aid multilateral trade and multi-lateral agreements

multiple exchange rates When a country sets different rates betweenits currency and foreign currencies depending on the class of im-ports May be used to control foreign exchange by limiting certaintypes of imports

433


Official Development Assistance (ODA) Foreign assistance that ex-cludes military related assistance export credits and private fundtransfers while having at least a 25 percent grant element The grantelement is defined as the excess of the loan or grantrsquos value over the(present) value of repayments calculated with a 10 percent interestrate

opportunity cost of capital The rate of return on the best alternativeuse for the funds It is the cost of alternative investments forgonewhen a particular investment is made

overvalued exchange rate When the official value of a currency is toohigh given the exchange rate that would otherwise prevail in inter-national money-markets given the supply and demand for thecountryrsquos currency

parastatal An institution such as a marketing board that is used by agovernment to control the production distribution internationaltrade and domestic price of a product This product might be anagricultural good or an input such as fertilizer

production function Describes for a given technology the differentoutput levels that can be obtained from various combinations of in-puts or factors of production

production possibilities frontier The trade-off between the maximumamount of two goods that can be produced in a country given exist-ing production technologies and the available productive resources

protectionism A reaction by an industry or a country to foreign com-petition That reaction is usually manifest through tariffs quotas orother means of reducing imports to shield domestic producers

public goods Goods or services that are non-rival (consumption or useby one person does not preclude consumption by another) and non-exclusive (a person cannot be excluded from consumption or useexcept at prohibitively high costs)

scale-neutral technology A technology that can be employed equallywell by any size firm

social cost The total value of resources used in production of a goodincluding the value of externalities which are not borne by the pro-ducer of the good or reflected in the market price

structural adjustment program Government program aimed at adjust-ing the economy to reduce imbalances between aggregate supply anddemand Structural adjustment programs typically involve devalu-ation of the foreign exchange rate to increase exports and reduceimports reduced government spending and removal of many gov-ernment policies that distort prices including barriers to trade

434

subsidized (concessional) credit Loans made with interest rates be-low the rates prevailing in the market

sustainable development Development that meets the needs of thepresent without compromising the ability of future generations tomeet their own needs

tariff A tax or duty placed on goods imported into a countrytechnology The method for producing something New technologies

are often embedded in inputs for example seeds or machines Hencehigher-yielding seeds or more efficient machines are often referredto as improved technologies Technological progress occurs whenmore output is obtained from the same quantity of inputs Technol-ogy transfer occurs when methods (perhaps embedded in materials)from one location are applied in a second location

terms of trade The relationship between the prices of two goods thatare exchanged for example the price of an export good relative tothe price of an import good When the price of an export good in-creases relative to the price of an import good the terms of tradehave increased for the export and are said to be favorable

trade preferences Refers to favorable tariff treatment accorded by onecountry or group of countries to exports of certain other countries

transactions costs The costs of adjustment of information and of ne-gotiating monitoring and enforcing contracts

World Bank The major multilateral-funded organization that makesloans to developing countries It contains the International FinanceCorporation the International Bank for Reconstruction and Devel-opment and the International Development Association

World Trade Organization (WTO) The international institution cre-ated in 1994 to replace the GATT and strengthen enforcement of in-ternational trade rules and the settling of trade disputes


435

Authors CitedPage numbers followed by

b mdash indicate material in boxesf mdash indicate material in figuresn mdash indicate material in footnotest mdash indicate material in tables

Achard Freacutedeacuteric 167Acharya Meena 192Adams Dale W 294 297 299 300Ahmed Raisuddin 314t 317Alston Julian M 230 232t 234 259Alwang Jeffrey 46 137 145 285bAnderson Kym 111 323 332 339 342

343 348 356 364Anderson S 138Angelsen Arild 174Asturias de Barros Linda 192 194bBaker Doyle C 193b 203Bardham P 291Barro Robert J 401Baumol William J 218Baxter Michael 255 259Beitema Nienke 254 259Bell Clive 270 280Bellu Lorenzo Giovanni 184Benjamin Dwayne 269Bennett Lynn 192Bennett M K 15 50Benor Daniel 255 259Berry Albert 280Bezuneh Mesfin 35f 152fBigot Yves 299Binswanger Hans P 217b 250 280

286 299Boserup Ester 154b 203Bouman F J A 299Braverman Avishay 268bBromley Daniel W 174 175Brooks Karen 268bBrown Lynn R 185 204Burnside Craig 405

Byerlee Derek 323Chan-Kang Connie 230 232t 317 323Chapagain Devendra P 175Chase Robert 410Chen Shaohua 29Christensen Cheryl 51tCistulli Vito 184Cline William R 280 327 356 364Cohen Benjamin J 392Collier Paul 414Colman David 111 336b 348Conklin Neilson 93fCourbois C 140Csaki Csaba 268bCummings Ralph W Jr 280 281Dalgaard Carl-Johan 405Davie Ted J 168de Janvry Alain 218 265 274 280 406de Waal A 200Deaton Angus 55 57bDeere Carmen D 203Dehmer Steven 254 259Deininger Klaus 274 280del Ninno Carlo 40 45Delgado C 140Dercon Stephan 193Diaz-Bonilla Eugenio 349Dimitri Carolyn 93fDixon John 145Dollar David 405Donald Gordon 300Doss Cheryl 197Duckham Alec N 149 150 160Duncan A J 138Easterly William 414

436

AUTHOR INDEX

Edirisinghe Neville 41Effland Anne 93fEhui S 140Eicher Carl K 24 160Ellis F 145Erbaugh Mark 192 194bEva Hugh D 167Evenson Robert E 250 319 323ndash4Fafchamps Marcel 218 274Falcon Walter P 3 324 365 368f 370Fan Shenggen 317 323Feder Gershon 280Feldstein Hilary Simms 185 193b 203

204Flores Rafael 45Fogel Robert 107Folbre Nancy 203Folmer H 184Foster A 277Foster Phillips 45 68Gallego Javier 167Gandhi Vasant P 235Garcia Andres F 342Gardner Bruce L 111 187Gavian Sarah 45Gelbard Arlene 85Gibbon David 145Giovannucci Daniele 337Gillespie Stuart 45Gittinger J Price 37 203 301 312 323

378Gladwin Christine H 203Glewwe Paul 186 204Graham Carol 351Graham Douglas H 299Grosh Margaret 40 45Guasch J Luis 268bGulliver Aidan 145Haddad Lawrence 185 193 204Hamilton Sarah 192 194bHareau Guy 245Harou Patrice 184Harris Colette 192 194bHarrison James A 255 259Haub Carl 85Hayami Yujiro 128 145 207ndash15 217b

225 250 252 293 299 323Heinrichs E A 176 192 194 285bHansen Henrik 405Herrero M 138Hertel Thomas 339

Hicks John R 212Hoisington Caroline 37 203 301 312

323 378Hopper W David 145Hossain Mahabub 292 299 317Houck James P 406Houtman R 299Irwin Michael E 176 192 194 285bJames Clive 245Jin Songquing 274 280Johnson D Gale 348Johnston Bruce F 47Joyce Joseph 389 392Juggins Janice 192 195Junhua Ehou 156bKaimowitz David 174Keeney Roman 339Kent Mary M 85Khandker Shahidur 292Kikuchi Masao 217bKoppel Bruce M 225Krishnan Pramila 193Krueger Anne O 323 394 397 404Krugman P 387bKu-Vera J C 138Lancaster Carol 414Landsburg Steven 112 113Lapenu Cecile 295 296Leathers Howard D 45 68Leaver J D 138Leslie Joanne 37 203 302 312 323 378Levinsohn James 411Lewin Bryan 337Lin Justin Y 156b 160Lin Lin 405Lipton Michael 38Loomis Robert S 146Luther Gregory C 176 192 194 285bMacMillian Margaret 411Maddison Angus 89Mahar Dennis J 179bMaimbo Samuel Munzele 398bMalingreau Jean-Paul 167Markandaya Anil 184Markandaya Kamala 25Marra Michele C 230 232tMartin Will 339 348 356 364Martorell Reynaldo 193Masefield G B 149 150 160Masters William A 259 273b 332 342Maxwell S T 411

437

AUTHOR INDEX

Mayaux Philippe 167McCleary Rachel 401McMillan Della 203Mellor John W 45 47 58 60t 68 131

314tMeyer Richard L 289 300Meyers Norman 163 164Michalopoulos Constantine 404Mills Bradford 245Moore Keith 192 194bMorrison Elizabeth 399

Ndiaye Aida 193Norman David W 145North Douglas C 128 218 223 225Norton George W 176 192 194 234

245 259 285b 405Obstfeld M 387bOlson Mancur Jr 128Ortiz Jaime 405Ouerghi Azedine 40 45Owen E 138Palomino Julio 233bPandya-Lorch Rajul 45 185 428Pardey Philip G 24 68 69 230 232t

234 254 259 405 428Pearce David W 184Pearson Scott R 3 324 365 368fPentildea Christina 185 204Peterson Everett 245Piesse Jenifer 405Pingali Prabhu 299 319 323ndash4Pinstrup-Andersen Per 45 185 245

259 306t 307 323 428Pitt Mark M 292Plucknett Donald L 236bPoats Susan V 203Posada Rafael T 235 259Puetz Detlev 55 198Purcell Randall B 399Quisumbing Agnes 185 204Ramakrishnan Usha 193Rangnekar D 138Ratha Dilip 398bRaup Philip M 260Rausser Gordon 187Ravallion Martin 28b 29Ray Debraj 280Reardon Thomas 319 320 323Repetto Robert 168Reynolds C K 138

Richards I 138Richards Timothy 167Riddell Roger 414Roberts Colleen 410Robinson Marguerite S 295 299Robinson Sherman 349Rogoff Kenneth 392Rosegrant Mark W 24 68 69 140 428Rosenzweig Mark R 217b 277Rosero Joseacute 197Rudra A 291Runge C Ford 24 68 69 428Ruthernberg Hans 160Ruttan Vernon W 111 128 207ndash15

225 226 250 252 259 293 299 394404

Sachs Carolyn 192 194bSachs Jeffrey 112 113 284 300 393 405

414 417Sadoulet Elisabeth 218 274 406Sahn David E 135Sain Gustavo 323Sangraula Prem 29Sarma J S 51t 235Schady Norbert 197Schiff Maurice 323Schioler Ebbie 245 259Schramm Gunter 161 164 179b 184 Schuh G Edward 378Schultz T Paul 187 319 323ndash4Schultz Theodore W 136 145 187 211

227Scobie Grant M 235 259Sen Amartya K 31b 45Senauer C Benjamin 24 68 69 428Sfeirounis Alfredo 163Sharma Shalendra 405Shirmer Isabelle A 168Siegel Paul B 46 137 145 337Singer H W 411Skjonsberg Else 145Smith Lisa C 193Smith T 138Spriggs John 317Staatz John M 24 160Steele M A 138Steinfeld H 140Stibig Hans-Juumlrgen 167Stiglitz Joseph 405Streeten Paul 324Sukhatme Vasant 404

438

AUTHOR INDEX

Tanzo Irene 192 194bTarp Finn 405Tesliuc Emil 40 45Thirlwall A P 111Thirtle Colin 405Thomas D 138Thorbecke E 28Tietenberg T H 184Timmer C Peter 3 301 304 312 319

320 323 324 365 368f 370Todaro Michael P 24Truman Harry S 399Turner R Kerry 184Valdes Alberto 323Varangis Panos 337Vink N 111von Braun Joachim 55 68 198 335 415

Von Pischke J D 299 300Von Thunen Heinrick 210nWalsh John 239bWarford Jeremy J 161 164 179b 184Webb Patrick 198White T Kelley 406Whiteside A 200Wigley Tom M L 168Williamson Oliver 226Wilson E O 168Wolgin J M 145Wood Stanley 254 259Wortman Sterling 280 281Wyatt T J 230 232tYaron Jacob 300Young Trevor 336b 348Zeller Manfred 289 295 296 300

Internet sourceshttpstats oecd orgqwidshttpusdamannlibcornelledureportserssorfieldrcs-bbyrcs2001pdfhttpwwwprborghttpwwwifpriorgindex1htmhttpwwwprborgPublicationsDatasheets20082008wpdsaspxhttpwwwifpriorgpubsbpbp001pdf

439

Works CitedAcharya Meena and Lynn Bennett ldquoWomen and the Subsistence Sector Economic

Participation and Household Decision Making in Nepalrdquo World Bank StaffWorking Paper Number 526 Washington DC World Bank 1982

Achard Freacutedeacuteric Hugh D Eva Hans-Juumlrgen Stibig Philippe Mayaux JavierGallego Timothy Richards and Jean-Paul Malingreau ldquoDetermination ofDeforestation Rates of the Worldrsquos Humid Tropical Forestsrdquo Science 9 August2002 (vol 297 no 5583) pp 999ndash1002

Adams Dale W ldquoThe Conundrum of Successful Credit Projects in FlounderingRural Financial Marketsrdquo Economic Development and Cultural Change vol 36(January 1988)

________ Douglas H Graham and J D Von Pischke eds Undermining RuralDevelopment with Cheap Credit Boulder Colo Westview Press 1984

Ahmed Raisuddin and Mahabub Hossain Developmental Impact of Rural Infra-structure in Bangladesh International Food Policy Research Institute ResearchReport No 83 Washington DC October 1990

Alston Julian M Connie Chan-Kang Michele C Marra Philip G Pardey and TJWyatt ldquoA Meta-Analysis of Rates of Return to Agricultural RampDrdquo IFPRIResearch Report 113 Washington DC International Food Policy ResearchInstitute 2000

________ George W Norton and Philip G Pardey Science Under Scarcity Principlesand Practice for Agricultural Research Evaluation and Priority Setting Ithaca NYCornell University Press 1995

Anderson Kym Distortions to Agricultural Incentives A Global Perspective 1955 to2007 New York and Washington Palgrave Macmillan and the World Bank2009

________ ldquoOn Why Agriculture Declines with Economic Growthrdquo AgriculturalEconomics vol 3 no 1 (October 1987) pp 195ndash207

________ ed Political Economy of Distortions to Agricultural Incentives WashingtonDC The World Bank 2009

________ and Yujiro Hayami The Political Economy of Agricultural ProtectionSydney Allen and Unwin 1986

________ and Will Martin eds Agricultural Trade Reform and the Doha DevelopmentAgenda Washington DC The World Bank 2005

________ and William A Masters eds Distortions to Agricultural Incentives in AfricaWashington DC The World Bank 2008

Angelsen Arild and David Kaimowitz ldquoRethinking the Causes of DeforestationLessons from Economic Modelsrdquo The World Bank Research Observer vol 14 no1 (February 1999) pp 73ndash98

Bardham P and A Rudra ldquoInterlinkage of Hand Labor and Capital Relations AnAnalysis of Village Survey Data in East Asiardquo Economic and Political Weekly(1978) pp 367ndash84

440

WORKS CITED

Bell Clive ldquoReforming Property Rights in Land and Tenancyrdquo World Bank ResearchObserver vol 5 (July 1990) pp 143ndash66

Benjamin Dwayne ldquoCan Unobserved Land Quality Explain the Inverse Productiv-ity Relationshiprdquo Journal of Development Economics vol 46 (1995) pp 51ndash84

Bennett M K ldquoInternational Disposition in Consumption Levelsrdquo AmericanEconomic Review vol 41 (September 1951) pp 632-49

Benor Daniel James A Harrison and Michael Baxter ldquoAgricultural Extension TheTraining and Visit Systemrdquo World Bank Washington DC 1989

Berry Albert and William Cline Agrarian Structure and Productivity in DevelopingCountries Baltimore Johns Hopkins University Press 1979

Bill and Melinda Gates Foundation Annual Report 2007 available online atwwwgatesfoundationorg

Binswanger Hans P ldquoAgricultural Mechanization A Comparative HistoricalPerspectiverdquo World Book Research Observer vol 1 (January 1986) pp 27ndash56

________ and Mark R Rosenzweig eds Contractual Arrangements Employment andWages in Rural Labor Markets in Asia New Haven Conn Yale University Press1984

________ and Vernon W Ruttan eds Induced Innovation Technology Institutionsand Development Baltimore Johns Hopkins University Press 1978

Boserup Ester The Conditions of Agricultural Growth London Allen and Unwin1965

________ Womenrsquos Role in Economic Development London Allen and Unwin 1970Bouman F J A and R Houtman ldquoPawnbrokering as an Instrument of Rural

Banking in the Third Worldrdquo Economic Development and Cultural Change vol 37(October 1988) pp 69ndash99

BRAC BRAC at a Glance March 2009 Available online at wwwbracnetBromley Daniel W ed Making the Commons Work San Francisco Institute for

Contemporary Studies Press 1992________ and Devendra P Chapagain ldquoThe Village Against the Center Resource

Depletion in South Asiardquo American Journal of Agricultural Economics vol 68(December 1984) pp 868ndash73

Brooks Karen J Luis Guasch Avishay Braverman and Csaba Csaki ldquoAgricultureand the Transition to Marketrdquo Journal of Economic Perspectives vol 5(4) Fall1991 pp 149ndash62

Burnside Craig and David Dollar ldquoAid Policies and Growthrdquo American EconomicReview vol 90 (September 2000) pp 775ndash86

Byerlee Derek and Gustavo Sain ldquoFood Pricing Policy in Developing CountriesBias Against Agriculture or for Urban Consumersrdquo American Journal of Agricul-tural Economics vol 68 (November 1986) pp 961ndash9

CGIAR Science Council Science for Agricultural Development Changing Contexts andNew Opportunities Rome Italy Science Council Secretariat 2005

Christensen Cheryl et al Food Problems and Prospects in Sub-Saharan Africa TheDecade of the 1980rsquos US Department of Agriculture Economic ResearchService Foreign Agricultural Research Report No 186 Washington DCAugust 1981

Cline William R Trade Policy and Global Poverty Washington DC Institute forInternational Economics 2004

Cohen Benjamin J ldquoWhat Ever Happened to the LDC Debt Crisisrdquo Challenge vol34 (May-June 1991) pp 47ndash51

Collier Paul The Bottom Billion New York Oxford University Press 2008

441

WORKS CITED

Colman David and N Vink Reshaping Agriculturersquos Contributions to Society OxfordUK Blackwell Publishing 2005

________ and Trevor Young Principles of Agricultural Economics Markets and Pricesin Less Developed Countries Cambridge Cambridge University Press 1989

Dalgaard Carl-Johan Henrik Hansen and Finn Tarp ldquoOn The Empirics of ForeignAid and Growthrdquo The Economic Journal vol 114 no 496 (June 2004) pp F191ndashF216

Davie Ted J and Isabelle A Shirmer ed Sustainability Issues in AgriculturalDevelopment Washington DC World Bank 1987

de Janvry Alain ldquoThe Role of Land Reform in Economic Development Policies andPoliticsrdquo American Journal of Agricultural Economics vol 63 (May 1981) pp 384ndash92

________ Marcel Fafchamps and Elisabeth Sadoulet ldquoPeasant Household Behaviorwith Missing Markets Some Paradoxes Explainedrdquo Economic Journal vol 101no409 (1991) 1400ndash17

________ Elisabeth Sadoulet and T Kelley White ldquoForeign Aidrsquos Effect on U SFarm Exportsrdquo U S Department of Agriculture Economic Research ServiceForeign Agricultural Economic Report Number 238 Washington DC Novem-ber 1989

de Waal A and A Whiteside ldquoNew variant famine AIDS and food crisis insouthern Africardquo The Lancet vol 362 October 11 2003

Deaton Angus The Analysis of Household Surveys Baltimore Johns Hopkins Univer-sity Press 1997

Deere Carmen D ldquoThe Division of Labor by Sex in Agriculture A Peruvian CaseStudyrdquo Economic Development and Cultural Change vol 30 1982 pp 795ndash811

Deininger Klaus and Hans Binswanger ldquoThe Evolution of the World Bankrsquos LandPolicy Principles Experience and Future Challengesrdquo World Bank ResearchObserver vol 14 no 2 (August 1999) pp 247ndash76

________ and Songquing Jin ldquoLand Sales and Rental Markets in TransitionEvidence from Rural VietnamrdquoOxford Bulletin of Economics and Statistics vol 70(February 2008) pp 67ndash101

________ and ________ldquoTenure Security and Land-Related Investment Evidencefrom Ethiopiardquo European Economic Review vol 50 (July 2006) pp 1245ndash77

Delgado C M Rosegrant H Steinfeld S Ehui and C Courbois ldquoLivestock to2020 the next food revolutionrdquo Food Agriculture and the EnvironmentDiscussion Paper 28 IFPRIFAOILRI Washington DC USA 1999

Dercon Stephan and Pramila Krishnan ldquoIn Sickness and in Health Risk Sharingwithin Households in Rural Ethiopiardquo Journal of Political Economy vol 108 no4 (August 2000) pp 688ndash727

Dias Bonilla Eugenio and Sherman Robinson ldquoThe WTO can Help Worldrsquos PoorFarmersrdquo International Herald Tribune March 38 2001

Dimitri Carolyn Anne Effland and Neilson Conklin The 20th Century Transforma-tion of US Agriculture and Farm Policy Washington DC Economic ResearchService USDA 2005

Dixon John and Aidan Gulliver with David Gibbon Farming systems and povertyimproving farmersrsquo livelihoods In a changing world Rome and Washington DCFAO and the World Bank 2001

Doss Cheryl ldquoThe effects of intrahousehold property ownership on expenditurepatterns in Ghanardquo Journal of African Economies vol 15 (1) (2005) pp 149ndash80

Duckham Alec N and G B Masefield Farming Systems of the World LondonChatto and Windus 1970

442

WORKS CITED

Easterly William The Elusive Quest for Growth Cambridge MIT Press 2002Edirisinghe Neville ldquoThe Food Stamp Scheme in Sri Lanka Costs Benefits and

Options for Modificationrdquo International Food Policy Research InstituteResearch Report No 58 Washington DC March 1987

Eicher Carl K and John M Staatz eds International Agricultural DevelopmentBaltimore Johns Hopkins University Press 1998

Ellis F Rural Livelihoods and Diversity in Developing Countries Oxford OxfordUniversity Press 2000

Evenson RE PPingali and TP Schultz eds Handbook of Agricultural EconomicsVolume 3 Agricultural Development Farmers Farm Production and Food Marketsed AmsterdamElsevier 2006

Fan Shenggen and Connie Chan-Kang Road Development Economic Growth andPoverty Reduction in China International Food Policy Research InstituteResearch Report No 138 Washington DC 2005

FAO Production Yearbook various years USDA Economic Research Service RiceOutlook and Situation Outlook Yearbook 2001

FAOSTAT data 2002 2005FAOTAT 2009 for years through 2006Feder Gershon and Klaus Deininger ldquoLand Institutions and Land Marketsrdquo World

Bank Policy Research Working Paper Series 2014 1999Feldstein Hilary Simms and Susan V Poats eds Working Together Gender Analysis

in Agriculture Vol I Case Studies West Hartford Conn Kumarian Press 1989Flores Rafael and Stuart Gillespie Health and Nutrition Emerging and Reemerging

Issues in Developing Countries IFPRI 2020 Vision Focus 5 February 2001Fogel Robert National Bureau of Economic Research Working Paper 9771 June

2003Folbre Nancy ldquoEngendering Economics New perspectives on Women Work and

Demographic Changerdquo Annual World Bank Conference on Development TheWorld Bank Washington DC 1995

Food and Agricultural Organization of the United Nations 2006 Global ForestResources Assessment Progress toward sustainable forest management FAOForestry Paper 147 Rome 350 pp

________ State of Food and Agriculture 2008 Rome FAO 2008Foster A and M Rosenzweig ldquoA Test for Moral Hazard in the Labor Market

Contractual Arrangements Effort and Health Review of Economics and Statisticsvol 76 (1994) 213ndash27

Foster J J Greer and E Thorbecke ldquoA Class of Decomposable Poverty MeasuresrdquoEconometrica Volume 52 (1984)

Foster Phillips and Howard D Leathers The World Food Problem Boulder Colo-rado Lynne Reinner Publishers 1999

Gardner Bruce L and Gordon C Rausser eds Handbook of Agricultural EconomicsNew York Elsevier 2001

Gelbard Arlene Carl Haub and Mary M Kent ldquoWorld Population Beyond SixBillionrdquo Population Bulletin vol 54 No1 Population Reference Bureau March1999

Gittinger J Price Joanne Leslie and Caroline Hoisington eds Food Policy Interact-ing Supply Distribution and Consumption Baltimore Johns Hopkins UniversityPress 1987

Gladwin Christine H and Della McMillan ldquoIs a Turnaround in Africa PossibleWithout Helping African Women to Farmrdquo Economic Development and CulturalChange vol 387 1989 pp 305ndash44

and

443

Glewwe Paul ldquoSchools and Skills in Developing Countries Education Policies andSocioeconomic Outcomesrdquo Journal of Economic Literature vol 40 (2) June 2002pp 436ndash82

Graham Carol Safety Nets Politics and the Poor Washington DC The BrookingsInstitution 1994

Grosh Margaret Carlo del Ninno Emil Tesliuc and Azedine Ouerghi For Protec-tion and Promotion The design and implementation of effective safety nets Washing-ton DC The World Bank 2008

Haggblade Steven Peter Hazell and Thomas Reardon Strategies for Stimulating Pov-erty-Alleviating Growth in the Rural Nonfarm Economy in Developing CountriesEPTD Discussion Paper No 93 International Food Policy Research Institute 2002

Hareau Guy George Norton Bradford Mills and Everett Peterson ldquoPotentialBenefits of Transgenic Rice in Asia A General Equilibrium Analysisrdquo QuarterlyJournal of International Agriculture vol 44 (2005) pp 229ndash46

Hayami Yujiro Anatomy of a Peasant Economy A Rice Village in the Philippines LosBanos Laguna Philippines International Rice Research Institute 1978

________ and Vernon W Ruttan Agricultural Development An International Perspec-tive Baltimore Johns Hopkins University Press 1985

Hicks John R Theory of Wages London MacMillan and Co 1932Hopper W David ldquoAllocation Efficiency in a Traditional Indian Agriculturerdquo

Journal of Farm Economics vol 47 (1965) pp 611ndash25Hossain Mahabub ldquoCredit for Alleviation of Rural Poverty The Grameen Bank of

Bangladeshrdquo International Food Policy Research Institute Research Report No65 Washington DC February 1988

Houck James P ldquoLink Between Agricultural Assistance and Agricultural TraderdquoAgricultural Economics vol 2 (October 1988) pp 158ndash66

The Hunger Project Ending Hunger An Idea Whose Time Has Come New YorkPraeger 1985

Hunger Task Force Ending Hunger It Can Be Done The Millennium Project Lon-don Earthscan 2005

IMF International Financial Statistics 2009International Food Policy Research Institute PROGRESA mdash Breaking the Cycle of

Poverty Washington DC IFPRI 2002Islam Nurul ldquoThe Nonfarm Sector and Rural Development Review of Issues and

Evidencerdquo 2020 Discussion Paper No 22 International Food Policy Research Insti-tute 1997

James Clive Global Status of Commercialized BiotechGM Crops 2008 ISAAA Brief No39 Ithaca NY ISAAA 2008

Johnson D Gale World Agriculture in Disarray 2nd ed New York St Martinrsquos Press1991

Joyce Joseph ldquoThe IMF and Global Financial Crisesrdquo Challenge vol 43 (July-August 2000) pp 88ndash107

Juggins Janice ldquoGender-Related Impacts and the Work of the International Agricul-tural Research centersrdquo Consultative Group for International AgriculturalResearch (CGIAR) Study Paper Number 17 World Bank Washington DC1986

Junhua Ehou ldquoEconomic Reform Price Readjustment (1978ndash87)rdquo Chinese EconomicStudies vol 24 (3) Spring 1991 pp 6ndash26

Koppel Bruce M ed Induced Innovation Theory and International AgriculturalDevelopment A Reassessment Baltimore and London Johns Hopkins UniversityPress 1995

WORKS CITED

444

Krueger Anne O ldquoAid in the Development Processrdquo World Bank Research Ob-server vol 1 (January 1986) pp 57ndash8

________ Constantine Michalopoulos and Vernon W Ruttan ed AID and Develop-ment Baltimore Md Johns Hopkins University Press 1989

________ Maurice Schiff and Alberto Valdes ldquoAgricultural Incentives in Develop-ing Countries Measuring the Effects of Sectoral and Economywide PoliciesrdquoWorld Bank Economic Review vol 2 (September 1988) pp 255ndash71

Krugman P and M Obstfeld International Economics Cambridge MassachusettsInstitute of Technology Press 1988

Lancaster Carol Foreign Aid Diplomacy Development Domestic Politics ChicagoUniversity of Chicago Press 2007

Lansburg Steven The Armchair Economist Economics and Everyday Life New YorkFree Press 1995

Lapenu Cecile and Manfred Zeller Distribution Growth and Performance ofMicrofinance Institutions in Africa Asia and Latin America IFPRI FCNDDiscussion Paper 114 Washington DC2001

Levinsohn James and Margaret MacMillian ldquoDoes Food Aid Harm the PoorHousehold Evidence from Ethiopiardquo National Bureau of Economic ResearchInc NBER Working Papers 11048 (2005)

Lin Justin Y ldquoThe Household Responsibility System Reform and the Adoption ofHybrid Rice in Chinardquo Journal of Development Economics vol 36 (2) 1991 pp353ndash73

Loomis Robert S ldquoAgricultural Systemsrdquo Scientific American September 1976 p 69Maddison Angus Economic Progress and Policy in Developing Countries New York

W W Norton and Co 1970Maimbo Samuel Munzele and Dilip Ratha Remittances Development Impact and

Future Prospects Washington DC World Bank 2005Markandaya Anil Patrice Harou Lorenzo Giovanni Bellu and Vito Cistulli

Environmental Economics for Sustainable Growth Northhampton Mass EdwardElgar 2002

Markandaya Kamala Nectar in a Sieve New York New American Library 1954Masters William A Government and Agriculture in Zimbabwe Westport Conn

Praeger 1994________ ldquoPaying for Prosperity How and Why to Invest in Agricultural Research

and Development in Africardquo Journal of International Affairs vol 58(2 2005) pp35ndash64

Maxwell ST and H W Singer ldquoFood Aid to Developing Countries A SurveyrdquoWorld Development vol 7 (1979) pp 223ndash47

McCleary Rachel and Robert J Barro ldquoPrivate Voluntary Organizations Engaged inInternational Assistance 1939ndash2004rdquo Nonprofit and Voluntary Sector Quarterlyvol 37 no 3 (September 2008) pp 512ndash36

Mellor John W Economics of Agricultural Development Ithaca NY Cornell Univer-sity 1966

________ and Raisuddin Ahmed eds Agricultural Price Policy for DevelopingCountries Baltimore Johns Hopkins University Press 1988

________ and Sarah Gavian ldquoFamine Causes Prevention and Reliefrdquo Science vol235 (January 1987) pp 539ndash45

________ and Bruce F Johnston ldquoThe World Food Equation Interrelations amongDevelopment Employment and Food Consumptionrdquo Journal of EconomicLiterature vol 22 (June 1984) p 533

WORKS CITED

445

Morrison Elizabeth and Randall B Purcell Players and Issues in US Foreign AidWest Hartford Conn Kumarian Press 1988

Munzele Maimbo Samuel and Dilip Ratha Remittances Development Impact andFuture Prospects Washington DC World Bank 2005

North Douglas C ldquoInstitutions Transactions Costs and Economic GrowthrdquoEconomic Inquiry vol 25 (1987) pp 415ndash8

Norton George W E A Heinrichs Gregory C Luther and Michael E Irwin edsGlobalizing Integrated Pest Management A Participatory Research Process AmesIowa Blackwell Publishing 2004

________ Jaime Ortiz and Philip G Pardey ldquoThe Impact of Foreign Assistance onAgricultural Growthrdquo Economic Development and Cultural Change vol 40 (July1992) pp 775ndash86

________ Philip G Pardey and Julian Alston Science Under Scarcity Principles andPractice for Agricultural Research Evaluation and Priority Setting Ithaca NYCornell University Press 1995

OECD database Development Cooperation Report 2008OECD International Development Statistics databaseOlson Mancur Jr ldquoBig Bills Left on the Sidewalk Why Some Nations Are Rich and

Others Are Poorrdquo Journal of Economic Perspectives vol 10 (Spring 1996) pp 3ndash24

Owen E T Smith M A Steele S Anderson A J Duncan M Herrero J DLeaver C K Reynolds I Richards J C Ku-Vera eds ldquoResponding to thelivestock revolution the role of globalisation and implications for povertyalleviationrdquo British Society of Animal Science Publication 33 NottinghamUniversity Press 2004

Pardey Philip G Nienke Beitema Steven Dehmer and Stanley Wood AgriculturalResearch A Growing Divide Washington DC IFPRI 2006

Pearce David W and R Kerry Turner Economics of Natural Resources and theEnvironment Baltimore Johns Hopkins University Press 1990

Pingali Prabhu Yves Bigot and Hans P Binswanger Agricultural Mechanization andthe Evolution of Farming Systems in Sub-Saharan Africa Baltimore Johns HopkinsUniversity Press 1987

Pinstrup-Andersen Per Food Subsidies in Developing Countries Baltimore JohnsHopkins University Press 1988

________ and Rajul Pandya-Lorch The Unfinished Agenda Perspectives on OvercomingHunger Poverty and Environmental Degradation International Food PolicyResearch Institute Washington DC 2001

________ and Ebbie Schioler Seeds of Contention Baltimore Johns Hopkins Univer-sity Press 2000

Pitt Mark M and Shahidur Khandker ldquoThe Impact of Group-based Credit Pro-grams on Poor Households in Bangladesh Does the Gender of ParticipantsMatterrdquo Journal of Political Economy (1998) pp 958ndash96

Plucknett Donald L ldquoSaving Lives Through Agricultural Researchrdquo ConsultativeGroup on International Agricultural Research Issues in Agriculture Paper No1 ( Washington DC May 1991) pp 9ndash10

Population Division of the Department of Economic and Social Affairs of the UnitedNations Secretariat World Population Prospects The 2004 Revision

Population Reference Bureau Inc 2008 World Population Data SheetQuisumbing Agnes R Lynn R Brown Hillary Simms Feldstein Lawrence

Haddad and Christina Pentildea ldquoWomen the Key to Food Securityrdquo InternationalFood Policy Research Institute Washington DC August 1995

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446

Raup Philip M ldquoLand Reform Issues in Developmentrdquo Staff Paper P75-27 Depart-ment of Agricultural and Applied Economics University of Minnesota St Paul1975

Ravallion Martin ldquoPoverty comparisons A guide to concepts and methodsrdquoLiving Standards Measurement Study Working Paper no 88 WashingtonDC World Bank 1992

________ Shaohua Chen and Prem Sangraula ldquoNew Evidence on the Urbanizationof Global Povertyrdquo Policy Research Working Paper forthcoming World Bank2007

Ray Debraj Development Economics Princeton Princeton University Press 1998Riddell Roger Does Foreign Aid Really Work Oxford Oxford University Press 2007Roberts Colleen ed Trade Aid and Policy Reform Washington DC World Bank

1988Robinson Marguerite S The Micro Finance Revolution Sustainable Finance for the Poor

Washington DC The World Bank 2001Rogoff Kenneth ldquoInternational Institutions for Reducing Global Financial Instabil-

ityrdquo Journal of Economic Perspectives vol 13 Fall 1999Runge C Ford Benjamin Senauer Philip G Pardey and Mark W Rosegrant

Ending Hunger in Our Lifetime Food Security and Globalization Baltimore JohnsHopkins University Press 2003

Ruthernberg Hans Farming Systems in the Tropics Oxford Oxford University Press1980

Ruttan Vernon W Agricultural Research Policy Minneapolis University of Minne-sota Press 1982

________ ldquoProductivity Growth in World Agriculture Sources and ConstraintsrdquoJournal of Economic Perspectives vol 16 (Fall 2002) pp 161ndash84

________ ldquoSolving the Foreign Aid Vision Thingrdquo Challenge vol 34 (May-June1991) p 46

________ Technology Growth and Development An Induced Innovation PerspectiveOxford Oxford University Press 2001

________ United States Development Assistance Policy Baltimore Johns-Hopkins1996

Sachs Jeffrey D Common Wealth Economics for a Crowded Planet New York PenguinBooks 2008

________ The End of Poverty Economic Possibilities for Our Time New York Penguin2005

________ Investing in Development A Practical Plan to Achieve the MillenniumDevelopment Goals the Millennium Project London Earthscan Publishing2005

________ ldquoA New Global Consensus on Helping the Poorest of the Poorrdquo AnnualWorld Bank Conference on Development Economics 1999

Sahn David E ed Causes and Implications of Seasonal Variability in Household FoodSecurity Baltimore Johns Hopkins University Press 1987

Sarma J S Cereal Feed Use in the Third World Past Trends and Protections to 2000International Food Policy Research Institute Research Report No 57 Washing-ton DC December 1986

________ and Vasant P Gandhi Production and Consumption of Foodgrains inIndia Implications of Accelerated Economic Growth and Poverty AlleviationInternational Food Policy Research Institute Research Report No 81 Washing-ton DC 1990 pp 17ndash34

WORKS CITED

447

Schady Norbert and Joseacute Rosero ldquoAre cash transfers made to women spent likeother sources of incomerdquo Economics Letters vol 101 (2008) pp 246ndash8

Schramm Gunter and Jeremy J Warford eds Environmental Management andEconomic Development Baltimore Johns Hopkins University Press 1989

Schultz Theodore W Transforming Traditional Agriculture Chicago University ofChicago Press 1964

Scobie Grant M and Rafael Posada T ldquoThe Impact of Technical Change on IncomeDistribution The Case of Rice in Colombiardquo American Journal of AgriculturalEconomics vol 60 no1 (February 1978) pp 85ndash92

Sen Amartya K Poverty and Famines An Essay on Entitlement and Deprivation NewYork Oxford University Press 1981

Sfeirounis Alfredo ldquoSoil Conservation in Developing Countriesrdquo Western AfricaProjects Department World Bank Washington DC 1986

Sharma Shalendra ldquoThe Truth About Foreign Aidrdquo Challenge (July-August 2005)pp 11ndash25

Siegel Paul B and Jeffrey Alwang An Asset Based Approach to Social RiskManagement SP Discussion Series 9926 Human Development Network SocialProtection Unit the World Bank Washington October 1999 67 pp

Skjonsberg Else Change in an African Village Kefa Speaks West Hartford ConnKumarian Press 1989

Smith Lisa C Usha Ramakrishnan Aida Ndiaye Lawrence Haddad and ReynaldoMartorell The Importance of Womenrsquos Status for Child Nutrition in DevelopingCountries International Food Policy Research Report number 131 WashingtonDC IFPRI 2003

Spriggs John ldquoBenefit-Cost Analysis of Surfaced Roads in the Eastern Rice Regionof Indiardquo American Journal of Agricultural Economics vol 59 (May 1977) pp375ndash9

Stevens Robert D ed Tradition and Dynamics in Small-Farm Agriculture Ames IowaState University Press 1977

Stiglitz Joseph ldquoOverseas Aid is Money Well Spentrdquo Financial Times April 142000 p 20

Streeten Paul What Price Food Agricultural Price Policies in Developing CountriesIthaca NY Cornell University Press 1987

Thirlwall AP Growth and Development New York Palgrave Macmillan 2006Thirtle Colin Lin Lin and Jenifer Piesse ldquoThe Impact of Research-Led Agricultural

Productivity Growth on Poverty Reduction in Africa Asia and Latin AmericardquoWorld Development 31 vol 12 (December 2003) pp 1959ndash75

Tietenberg T H ldquoThe Poverty Connection to Environmental Policyrdquo ChallengeSeptember-October 1990 pp 26ndash32

________ and H Folmer eds The International Yearbook of Environmental andResource Economics 20042005 Cheltenham UK Edward Elgar 2004

Timmer C Peter Getting Prices Right The Scope and Limits of Agricultural Price PolicyIthaca NY Cornell University Press 1986

________ Walter P Falcon and Scott R Pearson Food Policy Analysis BaltimoreJohns Hopkins University Press 1983

Todaro Michael P Economic Development New York Addison Wesley 2008Truman Harry S ldquoInaugural Address of the Presidentrdquo Department of State

Bulletin 33 Washington DC January 1949United Nations Centre for Social Development and Humanitarian Affairs

ldquoWomen Food Systems and Agriculturerdquo 1989 World Survey on the Role ofWomen in Development New York United Nations 1989

WORKS CITED

448

United Nations Department of Economic and Social Affairs Population DivisionWorld Population Prospects The 2006 Revision Highlights Working PaperNo ESAPWP202 2007

________ Development Program Human Development Report New York PalgraveMacmillan 2007

________ Development Programme Human Development Report 20072008 NewYork Palgrave Macmillan 2007

________ Human Development Report 2005 New York Hoechstetter 2005________ Human Development Report 2007ndash2008 (New York Palgrave Macmillan

Press 2007)________ Population Division World Population Prospects 2004 Revision Popula-

tion Database________ World Population Prospects the 2002 Revision New York United Nations

2003________ World Population Prospects The 2006 RevisionUN Standing Committee on Nutrition Fifth Report on the World Food Situation

Nutrition for Improved Development Outcomes New York United Nations 2004143 pp

U S Census Bureau 2005USDAERS 2008Varangis Panos Paul Siegel Daniele Giovannucci and Bryan Lewin ldquoDealing with

the Coffee Crisis in Central America Impacts and Strategiesrdquo The World BankDevelopment Research Group Policy Research Working Paper 299 March2003

von Braun Joachim Rising Food Prices What Should be Done IFPRI Policy BriefApril 2008

________ and Detlev Puetz Data Needs for Food Policy in Developing CountriesWashington DC International Food Policy Research Institute 1993

________ Detlev Puetz and Patrick Webb ldquoIrrigation Technology and Commercial-ization of Rice in The Gambia Effects on Income and Nutritionrdquo InternationalFood Policy Research Institute Research Report No 75 Washington DC1989

Von Pischke J D Dale W Adams and Gordon Donald Rural Financial Markets inDeveloping Countries Their Use and Abuse Baltimore Johns Hopkins UniversityPress 1983

Walsh John Preserving the Options Food Productivity and Sustainability ConsultativeGroup for International Agricultural Research Issues in Agriculture No 2Washington DC 1991

Wigley Tom M L ldquoThe Science of Climate Changerdquo Pew Center on ClimateChange Report 2005

Williamson Oliver The Economic Institutions of Capitalism New York Free Press1985

________ ldquoThe Economic Institutions of Capitalismrdquo Rand Journal of Econometricsvol 17 1986 p 280

Wilson E O ed Biodiversity Washington DC National Academy Press 1988Wolgin J M ldquoResource Allocation and Risk A Case Study of Smallholder Agricul-

ture in Kenyardquo American Journal of Agricultural Economics vol 54 (1975) pp622ndash30

World Bank Annual Review of Development Effectiveness 2000 supplement Table 13aAvailable online at wwwworldbankorg

________ Engendering Development New York Oxford University Press 2001

WORKS CITED

449

World Bank World Development Indicators 2008 2005 2000________ World Development Indicators on-line database________ World Development Indicators Online Database 2005________ World Development Report 2008 New York Oxford University Press________ World Development Report 1984________ World Development Report 1986 New York Oxford University Press 1986________ World Development Report 1980 New York Oxford University Press 1980________ and the International Fund for Agricultural Development Gender in

Agriculture Sourcebook Washington DC The World Bank 2009World Commission on Environment and Development Our Common Future New

York Oxford University Press 1987World Health Organization 2003________ Statistical Information System 2006________ World Health Report 2005 Make Every Mother and Child Count (Geneva

WHO Press 205) 252 ppWorld Vision International 2008 Annual Review Available online at wwwwviorgWortman Sterling and Ralph W Cummings Jr To Feed This World The Challenge

and the Strategy Baltimore Johns Hopkins University Press 1978Yaron Jacob ldquoWhat Makes Rural Financial Institutions Successfulrdquo World Bank

Research Observer vol 9 (1 1994) pp 49ndash70Zeller Manfred and Richard L Meyer The Critical Triangle of Microfinance from

Vision to Reality Baltimore Johns Hopkins University Press 2003

WORKS CITED

450

Subject Index

Aaccess to information 313adaptive research 242adjustable interest rates 382adjustment costs 358Afghanistan 166 395 396t 409Africa 4 5 6f 8 10 52 71 94 135b 149

150 152f 158 166 175 188 208ndash9239b 245 246 249t 252 261 262t263b 285 332 3422 343t 361 378382 383

Central 51tEastern 51t 399Horn of 284North 253tSouthern 51t 245 254 319 357 399Sub-Saharan see Sub-Saharan AfricaThe Sahel see Sahel TheWest Western 51t 135b 150 190

194b 277 352Africa Rice (WARDA) 249tAgricultural Trade Development and

Assistance Act of 1954 407agricultural

development 141ndash3 207ndash24 365ndash90integrated approach to 415ndash22role of trade 335ndash6theories of 207ndash12

export taxes 340ndash2extension see extensionlabor markets 275ndash8lobbies 331

prices of products and land 375production 39ndash40productivity 168ndash70 228ndash31

defined 5research see agricultural researchsystems 146ndash59technology 29ndash30trade 11 354

agricultural research 227ndash58categories of 241ndash3economic benefits 245ndash6environmental effects 238ndash9international research centers 246ndash9nutritional implications 237ndash8organization of 246ndash8rate of return on investment 232tspending 252ndash4 253ttransferability of results 250

agriculturechange in 417ndash20conservation 196bexport-oriented effects of 335foreign assistance to 400intensive use 21 209ndash10revolution first amp second 22brole of in development 18ndash22settled 22btraditional 131ndash43

agroforestry 249tAhmed Raisuddin 317AID see USAIDAIDS 10 77 356 424

see also HIV-AIDSallocative efficiency 100Amazon 175 179bAmerica see Latin North SouthAndes mountains 34 164anemia 41animal

inputs 285ndash6power compared with labor 157products 50 164

Page numbers followed byb mdash indicate material in boxesf mdash indicate material in figuresn mdash indicate material in footnotest mdash indicate material in tables

Note Proper nouns come before thesame word used generically ie

Human comes before human

agricultural continued

451

SUBJECT INDEX

annual cropping 154banti-feudal land reforms 265ndash7applied research defined 242Argentina 19 20t 251 332 339 372 385Asia 4 5 5f 71 94 138 142 166 168

188 190 192 195 198 208 209ndash10236b 246 247 253t 261 262t 263b286 319 342 343t 382 395 408 409423

Central 343tEast 319 383 388South 28b 94 148 158West 253t

Asian-Pacific countries 357asset redistribution 223assistance programs 393ndash406Atlantic Ocean 8Australia 20t 208 343t

Bbalance of payments 371banana(s) 57b 153 175 180 249t 264

333 337Bangladesh 20t 30 31b 38 71t 82f

143f 164 165f 292 294f 295 306t314t 315f 317 341 396t 408 409

Bangladesh Rural AdvancementCommittee (BRAC) 401

basic research 241ndash2bawon rice harvesting system 217bBedouin pastoral nomads 150Belarus 72tBelgium 400Benin 72tBennet MK 15 50Bennettrsquos law 50bilateral preferential agreements 352bio-diesel 60Biodiversity (IPGRI) 249tbiofuels 8 26 60ndash1 283biological technologies 22bbiotechnology research 243

benefits and costs 244ndash5products of 244

birth rates 75ndash6 77ndash9reduction of 79

Bolivia 132black market 305bloc-floating system 379Bolivia 396tBorlaug Norman 236b

Boserup Ester 154bBotswana 10 138 193b 332Brazil 20t 51t 60 71t 167 175 179b

188 228 229t 305 306t 313 339 341372 385 388 396t

Bread for the World 401Britain 103 114 209 328b 382 400Brimley Daniel W 175Brown Lynn R 185buffer stock program 307 359ndash60Buffett Warren 401Bulgaria 72t 268bbullock 141fBurkina Faso 72t 245Burundi 72tbush fallow cultivation 154b

Ccalorie

availability 5 32 33fintake 15

Cambodia see KampucheaCamp David Peace Agreement 408Canada 20t 343t 358 407 Canadian International Development

Agency(CIDA) 399capital

accumulation 101 104ndash5 116 274flight 381flows 388ndash9 393ndash8human 102 106ndash7-intensive goods 21ndash2-led growth 127markets 11 379ndash80physical 104ndash5physiological 107social 109sources of 116trade interactions 335

CARE 409bCaribbean 175 192 253t 358 361 383

385Caribbean Basin Initiative 352cassava 34 228 247 249t

mealybug 239bmosaic virus 228

casual labor 276ndash7Catholic Relief Services 401cattle 58f 133ndash4b 135b 138ndash41 152ndash3

175CDM = Clean Development Mechanism

452

SUBJECT INDEX

ceblokan harvesting system 217bCentral America 113 141 149 164 181

193 194b 209 264 277ndash8 319 337 358Centre for International

Forestry Research (CIFOR) 249tCentro de Mejoramiento de Maiz y

Trigo (CIMMYT) 424bCentro Internacional

de Agricultura Tropical(CIAT) 249tde la Papa (CIP) 249t 251f

cerealimport facility 361products 41 61 164

CGIAR = Consultative Group forInternational Agricultural Research

Chan-Kang Connie 317Chapagain Devendra P 175chemical

fertilizers 283pollution 170 284

Chenery Hollis 116child children

as investment 77ndash9 200ndash1benefits of 77 134bconsumption benefit 77education of 187ndash8 190f 200ndash1employment of 77ndash8 200ndash1malnutrition 77mortality 78

Chile 396tChina 10 30 71 71t 79 117 138 155

156b 164 166 192 228 229t 254 264267 270 284 306t 313 317 398b 423

CIAT = International Center forTropical Agriculture 239b 249t

CIDA = Canadian InternationalDevelopment Agency

CIFOR = Centre for InternationalForestry Research 249t

CIMMYT = International Center forMaize and Wheat Improvement 247249t 424b

CIP = Centro Internacional de la Papa(International Potato Center) 251f

Clark Colin 115Clean Development Mechanism 180ndash1climate change 12 140ndash1 148 152 168ndash9

adaptation to 168ndash9Cline William R 327cocoa 18 135b 153 180 277 333 337

338 340ndash1 344t 359 361

coffee 18 135b 153 175 180 192 255313 333 337 338 340 341 344t 359361

collectiveaction 219 350land tenure system 154ndash5 156b 264ndash5self reliance 357

Colombia 1f 20t 43f 58f 79 199f 235266 276b 306t 396t

commodityagreements 359ndash60groups 331ndash2marketing boards 316bmarkets 8price trends 360supply curve 230

common property management 180communicable diseases 10communications 313ndash5comparative advantage 113 329ndash31 380

principle of 329 330bCompensatory Financing

Facility (CFF) 361Schemes (CFS) 360ndash1

competitive advantage 380complements defined 53Congo Democratic Republic of

72t 74f 395Conservation Agriculture for Sus-

tainable Agriculture and RuralDevelopment (CA) 196b

labor effects 196bconstraints to trade 337ndash46

external demand 337ndash8Consultative Group for International

Agricultural Research(CGIAR) 247 248

consumer subsidy 304fconsumption parameters 56ndash9contraception 79cooperative farms 264copyrights 240 355Corn Laws 114 328bcorporate farms 264corruption 345 376ndash7 420ndash1cost differences 329cost of adjustment problems 351cost-recovery measures 189Costa Rica 387 396tCote drsquoIvoire 361 383cotton 133b 333 338 340 344t 358 361

453

SUBJECT INDEX

creditaccess to 197ndash8government-assisted programs 293ndash8markets 281ndash97policy lessons 296ndash7role of 288ndash9subsidized 293ndash5

crop rotation 22b 209cross-price elasticities 53cross-sectional data 54ndash5Cuba 266Cummings Ralph W 281current account deficit 382 383b

DDacca 31bdairy products sector 140 339death rates 75ndash6Deaton Angus 57bdebt

buying-back 387crisis 382ndash5

causes 382ndash3effects 383ndash5solutions 385ndash8

foreign 12 351forgiveness 400for conservation (nature) swap 387forgiveness partial 386relief 42ndash3 385ndash8rescheduling 386ndash8service 383

default probability 291 385deforestation 12 13 162 166ndash8 167f

179b 238results of 170

degradation of natural resourcessolutions to 176ndash82

demandcurve(s) 48 48f 52 63f 345effective 47ndash56

defined 47factors 8food 47ndash65

aggregate changes in 58ndash9determinants of 48ndash59 60t

influences on 58ndash9growth of 60t 407income

effect on 49elasticities of 49ndash52 91ndash2

-induced changes in 56ndash8interactions with supply 61ndash5law of 48price elasticity of 92shifts (food) 7 91-supply interactions 61ndash5

Democratic Republic of the Congo 72t74f 395 396t

demographic transition 76f 77dependency theory 119-20 127derivatives markets 361ndash2desertification 12 164ndash6 170 238

defined 165determinants of farming systems 146ndash9devaluation 372ndash3 384ndash5Development Assistance Committee of

OECD 397Development Round = Doha Round

353 356development 14ndash5 415ndash20

agricultural 207ndash24 393ndash406assistance programs 398ndash401banks regional 402diffusion theory 210ndash1location theory 210strategies 121-7

growth vs equity 124-5industry versus agriculture 122inward vs outward-led 123-4private vs public 125-6

sustainable 196bdefined 14

theory 87ndash128trade protectionism 119-20two-sector model 116-9value judgments 18

DFID = United Kingdom Departmentfor International Development

Dhaka Bangladesh 82fDiaz-Bonilla Eugenio 349dietary energy 32diminishing returns law of 97ndash8disease(s)

child 77communicable 10

diversification 137 210 345 358ndash9diversity biological 168division of labor 106 113Doha Round

trade negotiations 353 356

demand continued

454

elasticity continued

SUBJECT INDEX

Domar Evsey 116drainage 209 283drip irrigation 284drought 165

-resistant plants 284dryland farming 133b 164ndash5dual-economy models 116-9 117f 127

236Duckham Alec N 149ndash50

EEC = European Communityeconometric model 55economic

determinants ofcrop and livestock mix 155ndash8input use 155ndash8

development 14growth 89ndash111

sources of 100ndash9opportunities 81optimality 95 98ndash100 100fsolutions to natural resource

degradation 177ndash82transformation 19ndash21 20t 89ndash111

Ecuador 20t 53f 103f 163f 201f 233b266 285b 372 386

educationadult 188ndash9benefits of 186ndash8for non-farm jobs 187role of 186ndash9types of 188ndash9

effectsincome 53ndash4substitution 53

efficiencyallocative 100f 106improvement 106input 157fmarket 106output 159fprice 100f 106technical defined 106

Egypt 51t 166 305 306t 332 395396t 408 411

Eicher Carl K 24El Salvador 396telastic defined 52elasticity

complements 53

cross-price 53estimates 54ndash6income effect 49ndash53methods for obtaining estimates 54ndash6own-price 52price of demand 52ndash4substitution effect 53unit elastic defined 52ndash3

employmentoff-farm 137ndash8

energy 60deficiency 32t 166

enforcement of environmentalprotections 182

Engelrsquos law 49ndash50England see BritainEnhanced Heavily Indebted Poor Coun-

try (HIPC) debt relief initiative 386enlightened self interest 222ndash4environmental

degradation 12 161ndash82 238effects of research 238ndash9problems 170ndash93

erosion soil 12 162ndash4 238caused by livestock 141

ethanol 60 283Ethiopia 20t 35f 42 164 193 198 395

396t 408 409Euphrates River basin 1666Europe 71 75 114 209 319 331 343t

399Eastern 71 164 268b 270 399Northwest 14 22b

European Community (EC) 353 361407

exchangeflexible 389 391foreign defined 371rate devaluation 384rates 335 341ndash2 371ndash3 373b 388ndash9

expanding the extensive margin 208exports

cash-crop 18industrial 18-oriented agriculture 335quotas 338 341taxes 155 307 308f 341 421

extension 254ndash6extensive

livestock systems 153margin 208

455

SUBJECT INDEX

external debt 381ndash8externalities 126 171ndash2 173b

FFactor Endowment Theory of

Trade 335 336bfactors of production 95Falcon Walter P 3 365family

nuclear 190planning 78 79size 77ndash9structure 185ndash202well being 197

famine 5ndash6 30ndash6 31b 125 422Fan Shenggen 317FAO = Food and Agricultural

Organization of the United Nationsfarm

products markets for 407size 231ndash4surpluses disposal of 407tenure 231ndash4

Farmer Field Schools 196b 285bfarming systems 249t

biological factors 148determinants of 146ndash59endogenous factors 148exogenous factors 148human factors 147f 148ndash9institutional factors 147f 148ndash9physical factors 148technical factors 147f 148types of 149ndash55womenrsquos role 191ndash5

farmscommercial family 262ndash3family 262ndash3group 264state 264 268btraditional 129f 131ndash43size of 132ndash4types of 264ndash5

FDI = foreign direct investmentfeeding programs 40ndash1Fei John 116female see womenfertility change 75ndash80fertilizer 22 133b 139 174 282 283 424b

natural sources of 283-responsive rice 217b

feudalism 265FGT = Foster Greer Thorbecke IndexFGT Index 28bfinancial

services 290systems microfinance approach 295ndash6

financing gap 116fiscal policy 368Fisher Alan 115fish fisheries 249t 306tfixed-payment leases 216

-rent contracts 267flooding 164Food and Agricultural Organization

of the United Nations (FAO) 35 248403b

foodaid see food aidbalance sheets 35ndash6consumption 26demand see food demanddeprivation 8emergency 409for work programs 43fortification 40ndash1grains 6 407intervention programs 40ndash1livestock role in supply 138ndash9market structure 319ndash20prices 6ndash8 29ndash30 390safety regulations 353bstamps 309subsidy programs 40 305supply 3ndash6 25ndash6 138ndash9 237 423ndash4

food aid 43 397 400 407ndash11food demand 25ndash43 47ndash56 91 423ndash4

economics of 47ndash65effective 47ndash59determinants of 48ndash9income elasticities of 49ndash52law of 48 48f

foot-and-mouth disease 353bFord Foundation 247foreign aid 369

capital flows 395ndash8content of programs 400effects of 403ndash5effects on donors 406humanitarian 394rationale for 412results 404ndash5

456

SUBJECT INDEX

forestry rate of return on investment 232tformal money markets 289 291ndash3Foster J 28bFoster Greer Thorbecke Index 28bFrance 20t 254 352 400Frank Andre Gunder 119free trade areas defined 357free-rider problem 125-6fungicides 284 285bFuture Harvest centers 247ndash9futures markets ldquoexchangerdquo 361ndash2

GGates Bill and Melinda 401Gates Foundation 424GATT = General Agreement on Tariffs

and TradeGaud William S 236bGDP = Gross Domestic Productgender roles 185ndash202

determinants of 195ndash201in traditional farming 141ndash2

General Agreement on Tariffs and Trade(GATT) 352ndash4 355

genetic engineering 243Germany 71 72t 254 328bGhana 316 340ndash1gini coefficients 262global trade war 354globalization 11ndash12GNI = Gross National IncomeGNP = Gross National Productgoat (s) 139 152ndash3goiter 34goods inferior normal superior 52governance assistance 400government role in marketing 316ndash8

information 317ndash8infrastructure 317regulations 318

grains food crops 8 153 333 407Grameen Bank of Bangladesh 292 294f

295grants foreign assistance 397Great Britain see BritainGreat Depression 316bGreece 20tgreen

-house gas emissions 181manuring 209revolution 22b 108b 236b 247 424b

Greer J 28bGross

Domestic Product (GDP) 15 83b 332366ndash7 367f

National Income (GNI) 16f 90f 91fNational Product (GNP) 15 383 400

groundnuts 133b 137 249t 344tgrowth

constraints to 114contemporary theory 120ndash1determinant of 227ndash8stages in economies 114-5sources of 100ndash9 101b 117strategies 112ndash26technology driven 116theory 120ndash7

Guatemala 174 180 313 420fGuinea 72t

HHaiti 396t 367Hamilton Sarah 194bHarrod Roy 116Harrod-Domar model 116Harrod-Domar-Chenery model 116harvest 133b 134

-labor institutional systems 217bHayami Yujiro 207HDI = Human Development Indexhealth 8ndash10 37ndash8 284

reproductive 400Heckscher-Ohlin-Samuelson Theory 336bhedging 362Heifer International 401herbicides 284herding nomadic 164hides livestock role in providing 139Hima pastoral nomads 150Himalayas 164HIPC = Enhanced Heavily Indebted

Poor Country (debt relief initiative)history of food aid 407ndash8HIVAIDS 10 38 77 195 200 400 415homogeneity condition 55ndash6Honduras 11f 13 188 372 396t 398bhorticultural products demand

marketing 320 320bHossain Mahabub 317Household Responsibility System 267HPI = Human Poverty Index

457

SUBJECT INDEX

HumanDevelopment Index(HDI) 15 27Poverty Index (HPI) 17 27

human capital 102 106ndash7 185ndash202 380Hungary 72tHunger Project The 80Hunger Task Force 428hunger 4ndash6 8 25ndash43 418f 423hunter-gatherer societies 22bHurricane Mitch 13

IIARCs = International Agricultural

Research Centers 246ndash9 251 257IBRD = International Bank for Recon

struction and Development 402ICARDA = International Center for

Agricultural Research in DrylandAreas 294t

ICRISAT = International Crops ResearchInstitute for the Semi-Arid Tropics249t

IDA = International DevelopmentAssociation 402

IFAD = International Fund forAgricultural Development 292

IFC = International FinanceCorporation 402

IFPRI = International Food PolicyResearch Institute 41 249t 335

IITA = International Institute ofTropical Agriculture 239b

ILRA = International Livestock ResearchInstitute 249t

IMF = International Monetary Fund350 361 386 387b 389 402

immunization efforts 422import

restrictions 338 385substitution strategy123 332 335

incentives government-sponsored 181income 15

effect 53elasticity of demand 49ndash52 51t 60tfluctuations 27 39

from agriculture 90transfer programs 308 309

Index level of living 15India 13 19 30 38 51t 71 71t 79 117

139 164 188 201 228 229t 234 236b254 266 277 284 306t 314t 332 339340 396t 398b 423

Indian ocean 8indirect pricing policies 308Indonesia 13 20t 51t 71t 79 167 198

201 228 229t 314t 333 334t 337 372396t

inducedinnovation theory 212ndash6 282 419

implications 219ndash21 220ftechnical 212ndash4 213f

institutional change 214ndash6 419in Java 217b

industrial revolution 22b 328binelastic demand

curve 345defined 53

inequality defined 17binferior goods 52inflation 367ndash8 369 370binformation

access to 313government provision of 317ndash8lack of for marketing 312

infrastructurecommunications 313ndash5deficiencies 312government role 316ndash8storage 313

innovation 108bpossibilities curve 212 213f

input(s) 281ndash98animal 285ndash6high payoff 211importance of 281ndash9manufatured 282ndash7mechanical 286markets 281ndash97 287ndash8response curve 95ndash6 96f 97fsubsidies 287 345

insecticides 284instability food price 7institutional change 239ndash40 350 424ndash5insurance 27 137 289Integrated Pest Management 176 194b

285 285bIntellectual Property Rights 121 240ndash1

355intensification 210intensive

annual crops 151f 152ndash3livestock 151f 153

intercropping 137

458

SUBJECT INDEX

interest rates 373ndash4adjustable 382negative real rates 374rural rates 289ndash93

InternationalAgricultural Trade Development and

Assistance Act of 1954(PL 480) 407 408 409b

Agricultural Research Centers(IARC) 246-9 251 257

Bank for Reconstruction andDevelopment (IBRD) 402

Center for Agricultural Research inDryland Areas (ICARDA) 249t

Center for Insect Physiology andEcology 248

Center for Maize and WheatImprovement(CIMMYT) 247 249t

Center for Tropical Agriculture(CIAT) 239b 249t

Centre for the Settlement of Invest-ment Disputes 402

Committee of the Red Cross 401Crops Research Institute for the Semi-

Arid Tropics (ICRISAT) 249tDevelopment Association (IDA) 402Finance Corporation (IFC) 402Food Policy Research Institute

(IFPRI) 41 249t 335Fund for Agricultural Development

(IFAD) 292Institute for Tropical Agriculture

(IITA) 239b 249tLivestock Research Institute (ILRI)

249tMonetary Fund (IMF) 350 361 386

387b 389 402Rice Research Institute (IRRI) 205f

247 249tWater Management Institute (IWWI)

249tinternational

agricultural research centers 246ndash9248f 249t

institutions laws 222 224trade see trade

investment 104 395ndash8foreign direct (FDI) 395portfolio 395

IPGRI see BiodiversityIPM = Integrated Pest Management

IPR = Intellectual Property RightsIR-8 = rice variety 247 424bIraq 166 395 396t 409iron

deficiency 34deficiency anemia 32t

IRRI = International Rice ResearchInstitute

irrigation 21 166 176 209 238 249t283 369 424b

Islam -ic 192iso-cost line 158iso-revenue line 158isoquant (curve) 96 97f 155ndash8Israel 264 265f 395 396tItaly 20tIWWI = International Water Manage-

ment Institute

JJapan 20t 71t 214 254 270 331 343t

371Japan International Cooperation Agency

(JICA) 399Java 164 217bJICA = Japan International Cooperation

AgencyJohnston Bruce F 47Jordan 396tJorgenson Dale 116

KKampuchea (Cambodia) 30 396t 408Katmandu Nepal 13fKefa Village Zambia 133ndash4bKenya 51t 139f 150 177f 248 314tkibbutzim 264 265fknowledge

as a public good 121as a source of growth 177

Korea 164see North Korea South Korea

kwashiorkor 34Kyoto Protocol 180ndash1

Llabor

casual vs permanent 276ndash7compared to animal power 157demand for 81 116ndash9dual-economy model 116ndash9

459

SUBJECT INDEX

exchange 137-intensive consumer goods 22-land ratios (US Japan) 214

marginal cost of 118-surplus 116-9 117f

markets 260ndash78 374ndash5seasonality 276

Laguna de Tigre national park 174Lancaster House Agreements 272bland 260ndash78

access to 261 269ndash70banks 274commissions 268bmarkets 260ndash78ownership 149 261ndash5reform 198 260ndash7 267ndash75 278

defined 261results of 271ndash4 272b

rights 261supply fixed 92tenure 260ndash7

reform 265ndash7systems 21 154ndash5 261ndash5use patterns 175

Landsburg Steven 112 113latifundia 263Latin America 4 5 6f 52 138 150 175

188 192 198 201 208 236b 239b 246261 286 342 343t 357 378 381 382383 385ndash6 388ndash9 390 402 405 415423

ldquoLa Violenciardquo 276bLaw 4 (1973) Law 135 (1961) Law 200

(1936) 276blaw of

demand 48ndash9diminishing returns 97ndash8 113

LDC = less-developed countries 338380

leading sectors 115leases fixed payment 216Lesotho 195less-developed countries (LDC) 338

382 390level-of-living index 15Lewis W Arthur 116licenses export and import 345life expectancy 15List Frederick 114-5livestock 192 247 285 423

impacts on environment 140ndash1

management systems 22brevolution 140roles of 138ndash41systems changes in 140ndash1 152ndash3

lobbying 342 376ndash7location theory 210Lome Convention 361Loomis Robert S 146Lucas Robert 120Lutheran World Relief 401

Mmacroeconomy 366ndash8 367f

institutions 222 420ndash1policies 365ndash75 376ndash8prices 370ndash5relationships 378ndash90stabilization 402

Madagascar 168 367Maddison Angus 89maize 6 7f 51t 60 61 133b 137 164

247 249t 257 282 306t 307 314t344t 424b

rate of return on investment 232tmalaria 10 38 283 424Malawi 72t 191 277 314tMalaysia 51t 332 333 334tMali 20t 72t 340malnutrition 8 25ndash43 254

causes of 36ndash9health and 37ndash8measurement of 34ndash6

Malthus Thomas 113marasmus 34Marginal Rate of Technical

Substitution (MRTS) 157ndash8marginal

cost curve 230lands farming of 12output gain 97ndash8product 95 97ndash9 99f 118

Markandaya Kamala 25 184marker-assisted breeding 243 246market -ing

agencies boards 340-based interventions 361ndash2deficiencies failures 172 311ndash5distortions govenrment-induced 312functions 311ndash15 312fgovernment role in 316ndash8

labor continued livestock continued

460

SUBJECT INDEX

organizations 315supply defined 61systems 311ndash15transformation 319ndash20

marketing and planning committees(MPCs) Nepal 320b

Marx Karl 114-5Marxist perspective 119Masai pastoral nomads 150Masefield G B 149ndash50Mauritania 361 367MDC = more developed countries 338MDRI = Mulltilateral Debt Relief

Initiativemeasles 37ndash8meat 306t 333

demand 142provided by livestock 139 153

mechanical innovation 108bMellor John W 47 131mercantilism 113-4 328bmeta project function 214methane digesters 139Mexico 20t 51t 166 188 201 247 271

305 306t 319 332 356 382 385 386388 398b

City 83bMFIs = Micro-finance institutions 295microbial degradation research 243microcredit 292ndash3micro-finance 292ndash3 295ndash6 398b 401Middle East 22b 246 284 405MIGA = Multilateral Investment

Guarantee Assoociationmigration

causes of 81ndash2consequences of 82ndash4rural-to-urban 81ndash4 83bseasonal 134ndash5 135b

milkdemand 142provided by livestock 139 153

Mill John Stuart 113millet 51t 150 247minifundia 263minimum wage legislation 374ndash5mixed farming 151f 152ndash3Moldova 20t 398bmonetary

measures 27policy 368ndash70

money-markets rural 289ndash93supply 370b

Mongolia 150monoclonal antibodies research 243monopoly rights 335monopsonistic power 310Morocco 306tmortality

child 8 9finfant 8 15

MPCs = marketing and planningcommittees Nepal 320b

MRTS = Marginal Rate of TechnicalSubstitution

Mugabe Robert 272bMultilateral

Debt Relief Initiative (MDRI) 386Investment Guarantee Assoociation

(MIGA) 402multi-

cropping 154blateral lending agencies 386

multiple exchange rate system 341ndash2multiplier effects 288Myanmar 167

NNAFTA = North American Free Trade

AreaNational

Agricultural Research InstitutionEcuador 233b

Integration Program 179bnational savings 116

naturaldisaster 31bmonopolies 126

natural resource(s) 103ndash4degradation 15 170ndash6environmental influences on 103ndash4

Near East 6f 166negative externalities 126Nepal 13f 129 135b 139 164 167f 191f

192 320bNetherlands 400New International Economic Order

(NIEO) 353 354 357New Zealand 343tNGO = non-governmental organizationNicaragua 396t

market -ing continued

461

SUBJECT INDEX

NIEO = New International EconomicOrder

Niger 72tNigeria 51t 71t 167 228 229t 314t

316b 341 386 395 396t 397nitrogen fertilizers 283Nobel Peace Prize 236bnon-governmental organization (NGO)

400 401 412normal goods 52North

America 14 71 114 208Korea 30ndash1 42 409

North American Free Trade Area(NAFTA) 357ndash8

nutritionalassessment 35ndash6 37feducation 42implications of ag research 237ndash8

OODA = Official Development

Assistance 397ndash8 400 412OECD = Organization for Economic

Cooperation and Development 397OECD Development Assistance

Committee of 397Official Development Assistance

(ODA) 397ndash8 400 412oil 103 306t 344t 386OPEC = Organization of Petroleum

Exporting Countries 400Oportunidades (Mexico) 201opportunity cost 329optimality economic 95options markets 361oral rehydration therapy 42Organization for Economic

Cooperation and Development(OECD) 397 400

Organization of Petroleum ExportingCountries (OPEC) 400

organized money markets 289 291ndash3output levels 98ndash100overgrazing 12 152 170overvalued currency 341Oxfam 401

PPacific 142 253t 361Pakistan 71t 166 201 236b 284 306t

396t

Pan-American Agricultural School 188Papua New Guinea 198Paraguayan Chaco 264parastatal(s) 315

marketing agencies 340Pardey Philip G 69Paris Club 386 387b 388 421pastoral nomadism 150ndash2patents 121 241 355Payments for Environmental

Services (PES) 181PBRs = Plant Breedersrsquo RightsPeace Corps 425peanuts 153 358 361Pearson Scott R 3peas 153 249tpeasant associations 274perennial crops 153permanent labor 276ndash7Peru 87 257f 271 385 387 396tPES = Payments for Environmental

Servicespesticides 12 170 178f 194b 282284ndash5

health problems from 284pollution 238resistance to 170 284

philanthropy 401Philippines 20t 51t 178f 188 194b

205f 247 264 271 277 306t 314t 333334t 383 396t 397 398b

phosphate(s) 283PL (Public Law) 480 407ndash8 409bPlant Breedersrsquo Rights (PBRs) 240 241plant genetic material 249tPoland 72tpolitical

power shifts 303rents defined 376self-interest 394system effect on agriculture 155

pollutionchemical 170

population 69ndash86 400distribution of 70ndash2growth 10 69ndash76 100ndash1projections 80 80f

portfolio investment 395Portugal 71 72tPosada Rafael T 235positive externalities 126potash 283

462

potatoe(s) 53 132 201f 247 249t 285bpests of 285b

potatoes sweet 133b 137 249tpoverty 10 17b 25ndash43 78 385

alleviation of 39ndash43 127causes of 36ndash9chronic 27ndash9defined 17b 26 28index 28blending approach 295ndash6measurement of 17b 27 28bmonetary indices of 28b-related problems 4ndash5rural 29transitory 27ndash9traps 29

power provided by livestock 141PPF = Production Possibilities FrontierPrebish Raul 119pressure groups 376ndash7price

ceilings or floors 303ndash4 304fefficiency 100elasticity of demand 52ndash4 91ndash2intervention 302ndash9policy 57b 155

pricing policies 301ndash11effects of 309ndash11influences on 301ndash2

Production Possibilities Frontier(PPF) 158

productionchoices 95ndash100function defined 95function(s) 95ndash7 96f 97f 101b

productivity 91 118 185effect 230growth rate 252improvements 228ndash31input 229fmeasures of 136

program food aid 409ndash10PROGRESA program 201project food aid 410property rights 172 178 275protectionism 119ndash20 328bprotein

animal 423deficiency 32t

Public Law 480 407public

goods 125

marketing agencies 340sanitation 10

pulses 51t 153pumpkins 133bpurchased inputs 155

Qquota(s)

quantitative restrictions 351rights 345trade 338 341 359

Rrandom migration 150Ranis Gustav 116rationality 136ndash7rationing 305Raup Philip M 260Reardon Thomas 319 320recession 385 390recombinant DNA research 243redistribution of land 270ndash4regional

development banks 402disparities 234ndash5

relative price of food 6remittances 395ndash7 398bresearch agricultural 227ndash58

activities in Ecuador 233bbiological and soils 240categories of 241ndash3effects

distributional 231-ndash38nutritional 231ndash38

impacts 228ndash31mechancalchemical 240outputs 227public vs private 240results 227ndash8 237ndash8

resourcesustainability 161ndash83use 161ndash83

respiratory diseases 10results of aid 404ndash5Ricardo David 113-4 329rice 6 7f 41 51t 57b 61 87 142 150

153 208 210 234 247 249t 257 303306t 314t 317 423

African variety 228fertilizer-responsive varieties 217b

SUBJECT INDEX

public continued

463

harvesting systems 217brate of return 232tresearch program benefits 235semi-dwarf 236b

ripper tiller Tanzania 196brisk 12ndash3 136ndash7 226ndash7 291Robinson Sherman 349Rockefeller Foundation 247 401Romania 72t 268bRomer Paul 120roots and tubers 51t 150 153 249t 333Rosegrant Mark W 69Rostow Walt W 115rotational grazing 177frubber 333 344truminants 153run-off caused by livestock 141Runge C Ford 69rural

finance 289ndash97labor markets 278

rural-to-urban migration 81ndash4causes of 81ndash2consequences of 82ndash4

Russia 71t 72t 372 388Ruttan Vernon W 207rye 22b

SSachs Jeffrey 112 113 393safety nets 40Sahel The 51t 164 166 284 424salinity salinization 166 283sanitary -tation 10 41ndash2 355

and phyto-sanitary measures (SPS) 355savage growth stage 114savings (credit source) 289schistosomiasis 283school fees 189schooling years of 15Schramm Gunter 161Schultz Theodore W 136 211 227Scobie Grant M 235seasonality 134ndash5 276seed(s) as input 282ndash3 2287Senauer Benjamin 24 69Senegal 361Serbia 72tsettled agriculture 151f 152ndash3 195share lease tenure 216 264

sharecropping 265b 277sheep (ruminant) 139 153 249tshifting cultivation 150 151f 195short

fallow cultivation 154bleases 175

Schultz Theodore W 227siltation 162ndash4

caused by livestock 141Singapore 333 334tSinger Hans 119slash and burn cultivation 150Smartwood 180Smith Adam 106 113social

institutions 102justice 197ndash9safety nets 27 29science research 223

soildegradation 162ndash4erosion 12 150 162ndash4 167f

caused by livestock 141Solow Robert 116 120Solow model of development 120 127Somalia 8 396tsorghum 150 153 193b 249t 314t 344tSoros George 401South

Africa 278 319America 34 71 166 194b 208 319

358Asia 148 166Korea (Republic of) 20t 51t 266 270

332 333 334t 372 396t 399Vietnam 408

Soviet Union 164 264 270 408soybeans 60 61 333specialization 92 105ndash6Spriggs John 317SPS = sanitary and phyto-sanitary

measures 355Sri Lanka 13 40ndash1 79 198 306tStaatz John M 24STABEX 361stabilization 345ndash6stages of development 114-5State Bank of Bangladesh 292state farms 266bstructural adjustment 342 378strucuralist perspective 119ndash20 329

SUBJECT INDEX

rice continued

464

subject-matter specialists (extension)255

Sub-Saharan Africa 4 5 8 10 28b 3051t 71 142 148 169 195 229 253t286 313 316b 381ndash2 385 390 395415 423

subsidizedcredit effects of 294ndash5irrigation water 175

subsidy -ies 345 369fertilizer 287food 305price 304 339

subsistence family farms 262substitutes defined 53substitution effect 53Sudan 306t 361 396t 409sugar 41 57b 192 306t 331 333 338

358 359sugarcane 60 140 153 175 335superior goods 52supermarkets growth of 321supply

curve 61 62f 63finteractions with demand 61ndash5shifts (food) 7-side factor 92

surplus labor model 116-9sustainable development defined 14sustainability 161ndash82Swaziland 10 1138sweet potatoes 133b 137Syria 166

TTampV system 255

= training and visit systemTaiwan 138 248 266 270 396tTajikistan 398 399Tanzania 150 167 196b 198 314t 340

341 361tariff(s) e338 341 354 357 359taxes taxation

collection 368ndash9export 155 307 308f 341ndash5 343tindirect 341

tea 41 306t 333 341technological

innovation theory 120-1progress 105 417ndash20

telecommunications 313ndash5

tenancy tenant farmers 234 264ndash5 266btesting research 243 252Thailand 13 20t 51t 57b 141f 208 254

306t 371 388Thorbecke E 28bTigris River basin 166Timmer C Peter 3 301 319 320Togo 340total product curve 95trade 105ndash6 327ndash46

agreements 124 357ndash8barriers 255 349ndash511 354deficit 371developing country experience 332ndash6effects 335 336bexternal constraints to 351ndash8historical roots of 328bimpediments 227ndash46liberalization 356 358need for 327ndash8negotiations 352ndash5 356policy 331ndash2protectionism 119-20quotas 359restrictions 329ndash32 338ndash42 344ndash5terms of 119ndash20 358

trademarks 240trading blocs 353traditional agriculture farms 131ndash43

size of 132ndash4Tragedy of the Commons 152training and visit system (TampV) 255transaction costs 113-21 126 216ndash24

267 291ndash3 419defined 218

transferability of research 250transformation economic 89ndash95

causes of 90ndash2Transforming Traditional Agriculture 211transgenics

crops 245research 243

transparency in government 350tree crops 232t 333tropical pastures 249tTruman President Harry S 398ndash9Turkey 51t 164 166 201 372 396tTurner Ted 401Twain Mark 14two-gap model of development 116

SUBJECT INDEX

465

UUganda 20t 72t 150UK Department for International

Development (DFID) 399Ukraine 72tUNCTAD = United Nations Conference

on Trade and DevelopmentUNDP = United Nations Development

Programunemployment 116ndash9unit elastic defined 52United Kingdom see BritainUnited Nations 353

agencies for assistance 403bChildrenrsquos Fund (UNICEF) 403bConference on Trade and Devel-

opment (UNCTAD) 353 354 357Development Program (UNDP) 248

403bEducation Scientific and Cultural

Organization (UNESCO) 403bFund for Population Activities

(UNFPA) 403bMillenium Goals 400

United States (US) 20t 28b 60 71t 74f93f 94 103 214 254 328b 331 333 339 343t 352 353b 356 371 371379 380 389 394ndash5 408 425

Agency for International Develop-ment (USAID) 197 236b 285b 399

Congress 408Department of Agriculture

(USDA) 28bfarm products 385Federal Reserve 390

urbanization 10 80ndash4Uruguay 251Uruguay Round 353 354ndash5USAID = United States Agency for

International Development

Vvegetable -s 133b 142 153 313 333

335 338 346marketing in Nepal 320b

Venezuela 386Vietnam 337 396t 408village agent model 255Vitamin A 41

deficiency 32t 34von Braun Joachim 415

Wwage

employment 266bminimum 374ndash5rates 117ndash18 374ndash5

Wallerstein Immanuel 119WARDA see Africa RiceWarford Jeremy J 161water 283ndash4

management 211 283quality 10supplies 12

Wealth of Nations The 106weed control 285 424bweeding 133b 134WFP = World Food Programmewheat 6 7f 22b 51t 153 164 191f 211

232t 234 247 249t 251 257 305306t 314t 325 333 339 344t 359424b

WHO = World Health Organizationwireless communications 313ndash15women

education for 38invisibility of 192ndash5opportunities for 79

WorldAgroforestry 249tBank 28b 36 197 255 351 386 402Commission on Environment

and Development 14Fish Center 249tFood Programme (WFP) 403bHealth Organization (WHO) 10 32

38 403b 421Trade Organization (WTO) 339 350

352 353 355ndash7 388Vegetable Center 248Vision International 401

World War I 328bWorld War II 270 316b 352 378 398Wortman Sterling 281

XY

Yellow River basin China 164Yemen 72t

ZZambia 133ndash4b 167 3006tZamorano Honduras 188Zimbabwe 180 272b 277 278

SUBJECT INDEX

Economics of Agricultural Development: 2nd Edition (Routledge Textbooks in Environmental and...

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Transcript of Economics of Agricultural Development: 2nd Edition (Routledge Textbooks in Environmental and...