Agric Planning and Development Notes (1).pptx

Agricultural economics

1. Introduction to Agricultural Planning and Development

2. Topic 1: Introduction

3. What is agric. planning? Quote 1 : Food will win the war and write the peace. But what foods are needed? Where and how shld these foods be produced? Who shld expand his operations to produce these food supplies? (Unknown) The answer: To be determined by agricultural planning committees Quote 2 : "There is a communion of more than our bodies when bread is broken and wine drunk. And that is my answer, when people ask me: Why do you write about hunger, and not wars or love?“ M.F.K Fisher (1943) in‘The Gastronomical Me’

4. What is agric. planning? Agric. planning is the development of plans and policies for more efficient output from agriculture. Sound agric policies shld be able to bring together the following three outcomes: Food production; Environmental protection & To maintain the socio-economic structures of rural areas.

5. What is development? Quote: “While humanity shares one planet, it is a planet on which there are two worlds, the world of the rich and the world of the poor ” ( Raanan Weitz , 1986) Development can be defined as the sustained elevation of an entire society and social system towards a better and more humane life. The core values of development are usually common goals that are sought after by most individuals and societies. These include sustenance, self esteem, freedom from servitude and freedom to choose.

6. What is development? According to Todaro (1994) development must have the following three objectives: To increase the availability and widen the distribution of basic life sustaining goods such as food, shelter, health etc To raise levels of living standards i.e. higher incomes, better jobs, education and greater attention to cultural and humanistic values To expand the range of economic and social choices available to individuals and nation

7. What is development? Development is a very broad process with various economic and social facets. For successful economic development to occur, at least per-capita incomes should increase, there should be eradication of absolute poverty, and reduced inequality. The process of economic development is an ever-changing one, and it includes changes in economic structures, levels of economic activity, as well as increased opportunities for better standards of living. In spite of the various improvements in living standards experienced by many across the globe, poverty remains widespread.

8. Agricultural Development Quote : “ It is in the agricultural sector that the battle for long term economic development will be won or lost” Gunnar (Nobel Laureate Economics) Agriculture plays a very important role in food security and economic development of many developing countries. Development strategies should focus on improving agricultural development, particularly in the rural areas of developing countries. Most economic problems such as widespread poverty, widening inequality gaps, rapid population growth and rising unemployment levels originate from the stagnation and often backwardness of economic life in rural areas.

9. Agricultural Development Agricultural development is a multi-sectional activity that has linkages with different sections of the economy such as the health, and the manufacturing sectors. Its main objectives include the improvement of the welfare of agricultural producers and the general public . Agricultural development can thus, be seen as synonymous with rural development. Agricultural development is an integral part of the rural development process; most rural dwellers are involved in agricultural production as their main livelihood strategy. Thus, to achieve agricultural development, there is also need to transform the livelihoods of these rural dwellers- who are mostly smallholder farmers.

10. Economic Growth vs Economic D vpt Economic growth refers to an increase in a specific measure of economic activity such as real national income, GDP or per capita income. It is usually measured over a certain period of time, for a particular economy. It entails a period when business activity surges. Economic growth can also be envisaged as an increase in the value of goods and services produced by an economy during a specific period.

11. Economic Growth vs Economic Dvpt In its broadest sense, e conomic growth includes 2 major areas: Policies that gvts stipulate in order to meet broad economic objectives & Policies and programs to provide structural adjustments in the economy for improved infrastructure, job creation and other services Economic Development refers to a sustainable increase in living standards of the general economy. E conomic growth of any specific measure is not a sufficient definition of economic development Economic development encompasses economic growth and structural changes in the economy

12. Economic Growth and Agriculture In most cases economic growth usually accompanied by an economic transformation from agriculture into other activities. As the economy grows, the agricultural sector grows more slowly than other sectors such as the manufacturing and services, and it then accounts for a declining fraction of output, employment, and consumer expenditures. The transformation of an economy from farm to non-farm activities as incomes rise applies to most countries. It is among the most reliable relationships in the world economy, and it has major implications on peoples’ lives.

13. Economic Growth and Agriculture The tendency for more developed countries to gain a smaller share of their income from agriculture is shown in Figure 1.1 and their tendency to get a smaller share of total employment in agriculture is shown in Fig. 1.2. One remarkable similarity shown by these 2 figures is the clear downward trend. Poor countries get a considerable share of their income from agriculture, while rich countries derive only a small portion from it. The figures also indicate that the agricultural sector never really disappears entirely in the rich countries. One major difference between the 2 figures as shown in the diagrams is that, in poor countries, the agricultural sector accounts for a larger portion of employment than of output.

14. Figure 1.1: Agriculture’s share of total output and Gross National Income, 2007 (Source: World Bank: World Development Indicators on-line database.)

15. Figure 1.2: Agriculture’s share of total employment and Gross National Income, 2005 (Source: World Bank: World Development Indicators on-line database.)

16. TOPIC 2: Role of agriculture in economic development

17. The role of agric. in economic dev. Various alternative development paths or strategies exist. The strategy followed by an one country at a specific point in time may be partially influenced by its resource endowments and stage of development. E.g certain countries with vast oil and mineral deposits have generated capital for development through export of those resources (Examples of OPEC Countries). Other countries with productive resources such as vast agricultural land and favourable climatic conditions have emphasized production of cash-crops such as coffee, tobacco, cotton, cocoa, and tea for export. With some focusing on industrial exports, others have focused on increases in basic food production to reduce food imports. The optimal development path varies from country to country, depending on stage of economic development, resource endowment as well as governance.

18. The role of agric. in economic dev. Following the classic analysis of Kuznets (1961) the agric. sector in LDCs may be seen as being potentially capable of four types of contribution to overall economic growth and development First, expansion of the non agric. sectors is strongly reliant on domestic agriculture not only for a sustained increase in the supply of food but also for raw materials used in manufacturing products such as textiles Kuznets termed this the production contribution Secondly, because of the strong agrarian bias of the economy during the early stages of economic growth, the agric. population inevitably forms a substantial proportion of the home market for the producer goods as well as consumer goods. This is termed the market contribution by Kuznets.

19. The role of agric. in economic dev. Thirdly, because the relative importance of agriculture in the economy inevitably declines with economic growth and development, agric is seen as the principal source of capital for investment elsewhere in the economy Thus the development process involves the transfer of surplus capital from agric to the non agric sector Similarly, development also entails the transfer of surplus labor from agric to the non agric sector especially over the long term Kuznets termed this as the factor contribution

20. The role of agric. in economic dev. Fourthly, domestic agric. is capable of contributing beneficially to the balance of overseas payments either by augmenting the country’s export earnings or by expanding the production of agric import substitutes This foreign exchange earnings is not explicitly identified by Kuznets but is implied in his market contribution .

21. 21 Product Contribution In LDCs, domestic agric sector is the principal source of food for consumption by non agric workers Diversification of the economy is therefore contingent upon food producers producing a surplus in excess of their own subsistence requirements Imports can make up for the shortfall save for foreign exchange problems scarcity Unlike capital goods food imports are consumed and do not augment the capital stock Opportunity costs of food imports are therefore higher than capital goods in terms of lower investment and consequently reduced rate of economic growth 21

22. 22 Product Contribution How does industrialization and urbanization affect the demand for food? As industrialization and urbanization proceed, the rate of increase in the off farm demand for food tends to exceed the rate of growth in industrial employment for two reasons: The first is because the real earnings of industrial workers are usually higher than those of agricultural workers Secondly because in LDCs the income elasticity of demand for food is relatively high So the migration of workers from higher paid industrial employment may cause a relative scarcity of food unless the productivity of those remaining in agric. rises fast 22

23. 23 Product Contribution Failure to expand food surplus quickly results into higher prices if free market operates or rationing if govt. intervenes to prevent prices from rising In LDCs, rapid food price inflation frequently leads to serious socio political instability which is inimical to economic growth Again because rising food prices increase the pressure for employment to concede higher wages which are correlated to productivity, industry terms of trade deteriorate Hence due to falling profits and lower investment there is drastic decline in industrial development 23

24. 24 Product Contribution In a developing economy where per capita incomes are rising, growth in the agric sector can be expected to lag behind non agric sector growth for three reasons: The demand for food and other agric products is generally less income elastic than the demand for non agric products due to the Engel effect (changes in dd as a result of rising incomes) Due to scientific advances and associated technological innovation in agriculture, farmers become increasingly reliant on inputs purchased from the non farm sector of the economy This is termed the changing resource structure of agriculture effect

25. 25 Product Contribution Because the demand for off farm marketing services distribution, storage and processing is more elastic than the demand for agric products at farm gate ,the farmer’s share of food expenditure at retail prices declines with time. This is what is called urbanization effect Taking into cognizance of the above three points, developing countries should Take note that the they should not fall into the trap of rapid industrialization without parallel development in agriculture

26. 26 Product Contribution There are two basic reasons why LDCs development based on structural diversification of the economy is constrained by the rate of growth in the marketed output of domestic agriculture The first reason is that the domestic farm sector is an important source of raw materials for use in industries such as textiles and food processing, as well as being the principal source of food for consumption by growing numbers of non food products employed in industry As agric. becomes more and more closely integrated with other sectors of the economy due to the changing resource structure and urbanization effects, the multiplier effects of increased agric production and incomes assume an ever increasing importance in relation to the growth in demand of labor and other industrial inputs

27. 27 Market Contribution Imagine a closed single sector agrarian economy on the threshold of sectoral diversification Though the per capita incomes of those employed in the industries may be expected to be somewhat above those of farmers, the farm sector because of its sheer size must initially be the major market for domestic industrial products Farmers’ expenditures on industrial goods both consumer goods and producer goods represent one aspect of agric. market contribution to general economic development The agric sector’ s market contribution also includes the sale of agric. food and other products to the non agric sector 27

28. 28 Market Contribution Kuznets describes the first as the marketization of the production process And the second as the marketization of the agricultural net product Both are accelerated by the adoption of new agric technology Adoption results in higher agricultural output and large marketed surplus of farm products 28

29. 29 Factor Contribution Whereas agric product contribution is derived from agric production per se and the market contribution is derived from trade with other sectors, the factor contribution is derived from resource transfers to other sectors The resources transferred are capital and labor including human capital. Here let us discuss why the net transfer of capital is a credible means of development. The main arguments against intersect oral capital transfers are based on considerations of equity Is it fair that farmers should be deprived of part of their wealth in order to fund developments in other sectors from which they derive no direct benefits? 29

30. 30 Factor Contribution Arguments for transferring capital are fourfold: The incremental demand for capital in the non agric sector may be higher in a developing economy because the demand for the non agric products and services is generally more income elastic than the demand for food and other agric products In effect the transfer reflects the declining relative importance of agriculture in the economy Secondly, the incremental capital output ratios in LDC agric may in fact tend to be lower than in LDC industries hence scope exists for raising productivity in agric using means that require only a moderate outlay of capital 30

31. 31 Factor Contribution For instance adopting high yielding crop varieties and improved strains of livestock and intensifying use of fertilizers and pesticides Thirdly, as the dominant sector in the economy of LDC’s, agric. is virtually the sole domestic source of savings and investment during the initial stages of development Foreign private investment and overseas aid are only supplementary sources of investment capital Fourthly, farmers are likely to benefit indirectly from non agric type investments such as improvement of communications and provisions of public utilities 31

32. 32 Factor Contribution Having argued a case for some transfer of capital from agric to other sectors we proceed to discuss the alternative means of transfer Governments can either rely on voluntary decisions of private investors in a free market situation or governments can resort to compulsions (interventions) Griffin (1979) summarizes the conditions governing free market transfer of capital from the agric sector to the non agric sector as follows: Farmers must sell part of their output outside of their own sector i.e. a market surplus of agric products must exist 32

33. 33 Factor Contribution Farmers must be net savers i.e. they must consume less than they produce Farmers’ savings must exceed their investment agriculture If these conditions are satisfied agriculture will have a balance of payments surplus with the rest of the economy 33

34. TOPIC 3: Theories and Principles of Growth and Development

35. Pre-developmental theories of Thomas Malthus and David Ricardo Quote 1 : “ Population, when unchecked, increases in a geometrical ratio. Subsistence only increases in an arithmetical ratio.” Thomas Malthus Quote 2 : “For the general prosperity, there cannot be too much facility given to the conveyance and exchange of all kinds of property, as it is by such means that capital of every species is likely to find its way into the hands of those, who will best employ it in increasing the productions of the country.” David Ricardo

36. The Malthusian Theory of Growth In his theory of growth, Thomas Malthus postulated that population growth is exponential, and follows a geometric progression, whilst food production follows an arithmetic progression. This theory is still influential even today due to the rapid growth in population that has been experienced world-wide (at least before the Covid Pandemic). Malthus argued that unless checked against the falling food supplies, the population of a country may double every 30 to 40 years He drew his analysis from the concept of diminishing returns and laid forth his argument in his book titled “ Essay on the Principle of Population ,” (1798). Malthus carried out his studies in the USA and he failed to take into consideration the part of the population growth in America that was as a result of immigration and not natural population growth. During this time, due to the diminishing returns to land- the fixed factor, food supplies only expanded at a roughly arithmetic rate.

37. The Malthusian Theory of Growth Since the growth in food production and supplies failed to keep pace with the growing population, per capita incomes had a tendency to fall so low as to lead to a stable population existing barely at or slightly above the subsistence level. As a result of this, Malthus argued that the only way to avoid this condition of chronically low levels of living standards or absolute poverty was for people to engage in “moral restraint” and limit the number of their offspring. Hence Malthus is sometimes regarded indirectly and inadvertently, as the brains behind the modern birth control movements.

38. Malthusian population trap This refers to “the threshold population level anticipated by Thomas Malthus (1766-1834) at which population increase was bound to stop because life sustaining resources, which increase at an arithmetic rate, would be insufficient to support human population, which increases at a geometric rate,” Todaro and Smith (2003). However, in reality population growth has not itself created the crisis that Malthus predicted in his theory of growth.

39. Criticisms of the Malthusian Theory Population growth- Population in most parts of the world has not grown at the rate Malthus predicted. Technical advancements- The theory did not take adequate consideration of the role and impact that technological progress may have on food production systems. Food production has increased over the years due to technical advancements. Global trade- Due to globalization, nations can trade goods and services for food. Calculations- Wrong calculations, which focused on the wrong variable- per capita income, as the principal determinant of population growth rates.

40. David Ricardo’s theory of economic growth David Ricardo also presented his views on economic development in his book titled “The principles of political economy and taxation,” (1817). In his writing he emphasized on the importance of agriculture in the economy, and in line with Malthus’ theory, he also appreciated the operations of the law of diminishing returns in the field of agriculture. The other main concepts covered in the Ricardian theory include the labour theory of value, the theory of comparative advantage, theory of rent, and the distribution of national income, among landlords, capitalist and labour . According to Ricardo agricultural development is important in economic growth, because industrial development depends on it. Ricardo’s analysis focused on growth aspects such as savings and capital accumulation . He also highlighted the limits of growth that may be as a result of the scarcity of natural resources.

41. David Ricardo’s theory of economic growth The Ricardian theory basically focuses on the interrelations among 3 critical groups in the economy. These are the landlords, capitalists (entrepreneurs), and the labourers . The produce from land is entirely distributed among these 3 as rent, profit and wages respectively. According to Ricardo 2 kinds of improvements that have the potential to increase profits in the agric. sector include (1) changes that increase land productivity and (2) changes that increase machinery used in agriculture. On changes that increase land productivity, Ricardo made a distinction between long term effects and short term effects. In the short term, land productivity occurs due to an increase in labour productivity, and it would have no impact on the demand of food, because population would not change much.

42. David Ricardo’s theory of economic growth As a result, less people would be employed in the agricultural sector. This increase in labor productivity would promote an increase in capital accumulation in the long run. Ricardo also stated that improvements in land productivity would reduce rents for the landlords. More productive land would generate more food, however, since population would not change immediately, agric. prices would fall. In addition, since more output would be produced from the same amount of land, the less productive land would not be used, thus, landlords would not receive rents for this land.

43. David Ricardo’s theory of economic growth On the other hand, an increase of machinery used would not reduce rents for the landlords. It would make it possible to produce a bigger output with less labor . In order to obtain more output; less land could not be used, because the output would grow more slowly than the capital stock. In the long term, both improvements (land productivity and machinery use) would increase marginal productivity and profits, and hence, the rate of capital accumulation.

44. The Stationary State As outlined by Ricardo, the stationary state was a point in the economy where growth was not achievable anymore, because of the diminishing agricultural returns. For example, when all the land of a country has been cultivated, the economy would have reached the point in which population, and profits cannot rise anymore. At this point, capital accumulation cannot increase too.

45. Some of the criticisms of the Ricardian Theory of Growth It overlooked the impact of technical advancements in counteracting diminishing returns of land. The concept of the stationary state is wrong, no economy attains the stationary state. Others argue that it is a theory of distribution rather than of growth. It overlooked the role of institutions in the economy. The theory is based on the Laissez-faire policy, i.e. no gvt intervention in the economy affairs, which is impossible practically. The Ricardian theory assumed that capital and labour are fixed coefficients an this is not true

46. Agricultural development models Quote: “ The process of agricultural growth itself has remained outside the concern of most development economists .” Yujiro Hayami and Vernon W. Ruttan (1985) Several theories of agricultural development have been proposed over time. In this section, we will look at the following theories/ models: The frontier model (Resource Exploitation Model) The resource conservation model The urban-industrial impact model (Location Model) The diffusion model The high-pay off input model The Induced Innovation model

47. The frontier model Historically, one main way of increasing agricultural production has been expansion of areas under cultivation or grazing. As a result of this, there has been the opening up of new continents- North and South America and Australia- to European settlement during the 18 th and 19 th centuries. The countries of the newly introduced continents became the most important sources of food and agricultural raw materials for the metropolitan countries of Western Europe.

48. The frontier model As a result of rapid population growth, the model did not last, its limits were quickly reached. Crop yields measured as output/ unit of seed were typically low. Output per hectare and per man hour also tended to decline.

49. The Resource conservation model This model was reinforced by the application to land of the law of diminishing returns to labour and capital, as postulated by the Classical Economists (Malthus, Ricardo, etc.) This theory has been applicable even up to the 20 th century, as the only approach to intensification of agric. production It involved the introduction and more use of green manure/ forage crops, and an increase in the use of animal manure

50. The Resource Conservation Model This system allowed the intensification of crop-livestock production through recycling of plant nutrients (using animal manure) to boost/ maintain soil fertility. The inputs used in this system were basically produced and supplied by the agric. sector itself. The inputs included plant nutrients, animal power, land improvements, physical capital, & agric labour force. In the premise of the conservation model, agric development was capable in many parts of the world of sustaining a rate of growth in agricultural production of around 1.0% per year over relatively long periods of time.

51. The Resource Conservation Model However, this growth rate is not compatible with modern rates of growth in the demand for agricultural output like food- which in developing countries typically falls between 3-5%. Nevertheless, the resource conservation theory remains an important source of productivity growth in most poor countries. While scientists are gaining additional knowledge of the technical and institutional considerations that can lower the cost of conservation efforts, population pressures are creating a need for better ways of sustaining the natural resource base. Hence, conservation is likely to play an increasingly important role in maintaining if not expanding agricultural production in the future.

52. The urban-industrial impact model The model is also known as the Location model. This model asserts that the urban industrial developments stimulate agricultural development created by the demand for food supply, as well as industrial raw materials. Initially, the urban industrial impact model was formulated (by Von Thunen ) to explain geographic variations in the intensity of farming system and in the productivity of labour in an industrialized society. Later this model was expanded to explain the more effective performance of the factor and product markets linking the agricultural and non-agricultural sectors in regions characterized by rapid urban-industrial development. Industrial development stimulated agricultural development through a number of ways among which include:

53. The urban-industrial impact model Expanding the demand for farm products Supplying the industrial inputs needed to improve agricultural productivity e.g. fertilizers Drawing away surplus labour from agriculture Improve incomes for the farmers Allow for improvement of transportation infrastructure Various tests of the urban industrial impact model have confirmed that a strong non-farm labour market is an essential pre-requisite for labour productivity in agriculture and improved incomes for rural people.

54. The Diffusion Model This model rests on the observation that there are substantial differences in land and labour productivity among farmers and regions. The theory describes patterns of adoption and explains mechanisms by which they occur. According to this theory, the route to agricultural development is through more effective dissemination of technical knowledge and narrowing of productivity difference among farmers and regions.

55. The Diffusion Model Dissemination of better agric. practices was seen as the main source of agric. productivity growth even in the pro-modern societies. Linkages among farmers themselves is important for effective transfer of existing technologies and knowledge from progressive farmers to the lagging farmers. This theory has created a rationale for agric. extension systems in which research findings are diffused from researchers/ extensionists to the farmers. This theory is also behind the efforts to transfer technologies and knowledge from the advanced countries to the LDCs.

56. The Diffusion Model While knowledge transfer from the developed countries has resulted in some improvements in agric. productivity, technological transfers have not been very successful Reasons for the failure of technological transfers include: Ethical factors- e.g. gene cloning Financial constraints Knowledge- level of awareness Cultural/ religious issues- acceptance Institutional- quotas

57. High Pay-off Input Model The inadequacy of policies based on the previous models (resource exploitation, resource conservation, and diffusion theories) led to a new viewpoint that the key to transforming a traditional agric. sector into a productive source of economic growth is investment designed to make modern high pay-off inputs available to farmers in poor countries. Peasants, in traditional agric. systems, were viewed as rational, efficient resource allocators. They remained poor because, in most poor countries, there were only limited technical and economic opportunities to which they could respond.

58. High Pay-off Input Theory The new, high pay-off inputs, can be classified into three categories: The capacity of public and private sector research institutions to produce new technical knowledge; The capacity of the industrial sector to develop, produce, and market new technical inputs; and The capacity of farmers to acquire new knowledge and use new inputs effectively

59. High Pay-off Input Theory The need for high-payoff inputs has been widely accepted because of the success achieved by modern wheat, corn, and rice varieties beginning in the 1950s and 1960s. These varieties are highly responsive to fertilizer, pesticides, and water management and have resulted in substantial growth in agricultural output in many developing countries. Some have argued that the relative absence of these inputs has been one factor holding back agricultural development in Africa compared to other developing regions.

60. High Pay-off Input Theory Hayami and Ruttan argue that the high-payoff input theory is incomplete as it fails to incorporate the mechanism through which these new inputs and technologies can be produced in a country. The theory also fails to explain how economic conditions stimulate the development of public agric. experiment stations and educational systems. Additionally, the theory does not attempt to identify the process by which farmers organize collectively to develop public infrastructure such as irrigation and drainage systems. In the next section we explore the Induced Innovation theory proposed by Hayami and Ruttan to address the shortcomings of this theory

61. Induced Innovation Model The induced innovation theory helps explain the process by which a society chooses an optimal path of technical and institutional change in agriculture. In this model, technical and institutional changes are regarded as endogenous to the development process, rather than as exogenous. 1. Induced Technical Innovation The theory says that technical change in agric. represents a response to changes in resource endowments and to growth in product demand.

62. Induced Innovation Model Technologies can be developed that facilitate the substitution of relatively abundant and low-cost inputs for relatively scarce and high cost inputs. A rise in the price of one factor/ input relative to others will induce technical change that reduces the use of that expensive factor/ input relative to others. E.g. if the price of land goes up relative to labour and fertilizer, indicating that land is becoming relatively scarce, technologies such as improved seeds will be developed that can be combined with labour and fertilizer to increase production per unit of land.

63. Induced Technical Innovation: Case study of Japanese vs US agric Japan- high land prices as compared to labour, hence in Japan development of biological technologies was stressed e.g improved seed varieties and fertilisers. These technologies save land and use labour intensively. US- land is more abundant than labour, development of mechanical technologies that saved labour was stressed. In both economies there was successful agric. development In Japan, agric output per hectare was higher than that in the US, whereas in the US, agric output per worker was higher than that in Japan

64. Induced Innovation Theory 2. Induced Institutional Innovation Where do new technologies come from? How do farmers get them? What determines whether technologies that are developed are suitable for all farmers or only for some of the farmers? All of these questions are addressed by the theory of induced institutional innovation. Farmers demand new technologies not only from private input suppliers but from the public sector as well. Hayami and Ruttan argue that public research scientists are guided by price signals and by pressures from farmers. The more highly decentralized the research system, the more effectively these pressures work.

65. Induced Innovation Theory Development of research systems can be as a result of pressures from farmers who are responding to market forces. Induced innovation occurs not only in agriculture but in the economy as a whole. For example, in the energy sector, as fuel prices rise, producers and consumers not only switch to existing, more energy efficient vehicles, but press for new types of vehicles that are even more fuel saving. The public sector can respond to this with introduction of new laws that require more fuel-efficient cars. Many other types of institutions (rules of society or organizations) affect technical change and agricultural development. The rights to land, marketing systems, government pricing and credit policies, and laws governing contracts are just a few. This theory recognizes that institutions can become obsolete and may need to be adjusted over time. It implies that new technologies and changes in relative resource endowments or price changes provide incentives for a society to demand new institutional arrangements

66. Policy Implications The above discussion has illustrated that technological progress is important for agric. dvpt as much as institutions and information. Although the theory of induced innovation provides an optimistic look at how market forces can work, the presence of transactions costs and collective action may act as obstacles to the success of the process. The reality that agric. and overall economic development has progressed steadily in some countries while stagnating in others, demonstrates that development is neither automatic nor hopeless. Thus, an operational agric. dvpt strategy that recognises the following is needed: (a) the role of relative prices in guiding technical and institutional changes; (b) that imperfect information and other transactions costs can sidetrack dvpt .

67. Policy Implications Provision of high-payoff inputs and credit to finance their purchase are additional components of a successful agric. dvpt strategy. Considering that farmers are efficient and rational resource allocators, new inputs embodying improved technologies are needed to improve their agric. productivity in developing countries. Research and technology-transfer policies can ease the development and adoption of these technologies. Pricing policies also, should be designed so as not to discourage the use nor encourage the abuse of the improved inputs. Farmers should also be educated on the benefits and use of the new technologies. Education improves the capacity of farmers to understand and use information, thus can help in reducing transactions costs.

68. TOPIC 4: Agriculture in developing and developed countries: planning for agricultural development

69. Classification of Developing Countries The dominant feature of Less Developed Countries compared with the rest of the world is their relative poverty LDCs and DCs can be distinguished with respect to the following attributes: Structure and organization of agriculture The behavior of agricultural producers

70. Common characteristics of Developing C ountries Low standards of living Low levels of agric. productivity High rates of population growth and dependency burdens Significant dependence on agric. production and primary product exports High degree of vulnerability in international relations 70

71. Low agricultural productivity in LDCs Agric. productivity is low in LDCs because agric. in these countries is characterized by: primitive technologies, poor organization and limited physical and human inputs Technological backwardness persists because third world agriculture is predominantly smallholder farming Lack of ownership of land- most peasants rent land thus no economic incentives for output and productivity improvements. While hunger and poverty are found in every region of the world, SSA is the only major region where per-capita food production has failed to at least trend upward in the past 30 years. As Figure 4.1 shows, per capita food production in Africa has stagnated since 1980 and had experienced a downward trend for several years before that time 71

72. Figure 4.1: Index of per capita food production Source: FAOSTAT data, (2005)

73. Traditional Agriculture in LDCs Traditional agric. is diverse, though the farms have some common characteristics. First, traditional agric. is basically characterized by small farms, which have intertwined farm and family decisions. The farm families consume, sell, or trade most of their products locally. Their labour use and land area per farm are small, but labour input per hectare is high. Hired labour is often important. The farmers are closely connected to the local economy and they respond to market signals.

74. Traditional Agriculture in LDCs Among the traditional farmers, productivity and use of purchased inputs are low but efficiency is relatively high. Thus, some people believe that technological advance may be the sole means of raising output and incomes in traditional agriculture These farmers are rational but risk averse. Because these farmers are risk averse, some people believe that significant increase in output can be achieved through more efficient use of existing technology. The upshot is that progress can be achieved by doing both i.e. improving production incentives as well as by encouraging farmers to make better use of present techniques

75. Planning for agricultural development : The CAADP Process Group Assignment Most of the programmes/ projects in the agricultural sector of Zimbabwe follow the principles of the Comprehensive Africa Agriculture Development Programme (CAADP), which is the African initiative to reach a higher path of economic growth through agriculture-led development. The work of CAADP falls under 4 Pillars , and each one deals with key issues of agricultural development. Question: Making reference to each of the 4 pillars, discuss the CAADP process in Zimbabwe and its implications on agricultural growth and economic development.

76. Topic 5: Institutional constraints

77. What are institutions? Institutions are “a set of formal and informal rules of conduct that facilitate coordination or govern relationships between individuals,” IFPRI Institutions are “the humanly devised constraints that shape human interaction” (North 1990). Institutions are “the rules of the game” (North 1994). Agricultural development requires the development of institutions that: incentivize economic activities, Reduce transaction costs, e.g farmer orgs like ZFU protect and enforce property rights and coordinate management of public good investments. Institutions matter for economic development.

78. Economic Institutions Economic institutions are a set of constraints that govern the relations among individuals or groups in economic activities. The economic activity could be production, allocation, distribution or exchange. Economic institutions make up the economic system-the framework that regulates economic activity. Economic institutions are understood as providing the incentive structure that encourages agents to behave in certain way instead of the other. They are critical in determining economic performance as they influence the cost of production, the mode of allocations and the costs of transactions.

79. Economic Institutions They may be broadly grouped into two categories: Those that define the forms of ownership of the means of production, and Those that define the mechanisms for resource allocation and co-ordination of economic activity. (Markets can thus be considered as one form of institutions coordinating economic activities). In the economic exchange of goods and services, then, institutions act as a set of constraints that govern the relations among individuals or groups in the process of economic exchange.

80. Economic Institutions Agricultural output markets are thin in the rural areas of most African countries. Especially, input markets, labor markets and financial markets are even thinner or non-existent compared to output markets. Given these facts, discuss the following by taking insurance markets as a case. Insurance markets are thin and sometimes non existent in rural areas. What corrective measures should be taken to improve the situation?

81. Institutional change and economic growth and development Institutions are critical to any explanation of economic development. However, institutions are to some extent endogenous to changing circumstances. Difficulties arise in explaining why very different institutional structures are sometimes equally conducive to growth and, symmetrically, why similar institutions lead to very disparate outcomes. What matters for growth is not any particular institutional design but how well institutions are adapted to their specific settings and how flexible they are in adapting to changing circumstances. Why have so few countries been able to create and sustain institutions favorable to growth and how can institutions be changed to support economic development rather than hinder it?

82. Efficiency Improvement Another type of organizational change that can lead to economic growth is improved production efficiency. Improved efficiency means getting more for the same inputs. Efficiency can be divided into different types. Technical efficiency relates to whether producers are producing on the production function as opposed to below or inside it. Using the same amount of inputs, some producers obtain higher output levels than others due to differences in management and effort. Price or allocative efficiency relates to the degree to which producers, operating on their production functions, employ the correct amount of inputs to equate their marginal revenue to their marginal cost of obtaining the last unit of output.

83. Efficiency Improvement By definition, producers who maximize profits are both technically and allocatively efficient. Market efficiency is related to the type of economic system and the degree of market power within it. Improvements in resource allocation occur through market efficiency when increased competition or new technology lowers the margin between buyers and sellers. A country that has a relatively free market with many buyers and sellers, so that no producer or consumer can affect prices, has greater market efficiency than one with a few producers who are able to control prices. The availability of good information affects the degree of market efficiency, and improved information flows can help create growth due to more efficient allocation of productive resources

84. Technology adoption in developing countries Quote : “We can realistically envision a world without extreme poverty by the year 2025, because technological progress enables us to meet basic human needs on a global scale.” Jeffrey Sachs (2005). Technology is defined as a stock of available techniques or a state of knowledge concerning the relationship between inputs and a given physical output. Technological change is an improvement in the state of knowledge such that production possibilities are enhanced. Adoption presupposes that the innovation (source of technological change) exists. By convention individuals within a population are classified into ( i ) innovators, (ii) early adopters, (iii) the early majority, (iv) the late majority, and (v) laggards, according to the date of adoption.

85. Technology adoption in developing countries In most developing countries, agriculture is still largely in the subsistence stage, and the farmers are often resistant to technological innovation in farming techniques or to the introduction of new seeds or different cash crops. Subsistence agriculture is a highly risky and uncertain venture. When risk and uncertainty are high, small farmers may be very reluctant to shift from a traditional technology and crop pattern that over the years they have come to know and understand to a new one that promises higher yields but may entail greater risks of crop failure. The decision of whether or not to adopt a new technology will be based on a careful evaluation of a large number of technical, economic and social factors.

86. Technology adoption in developing countries Some of the elements which may influence adoption of technologies are explained below: Technical attributes of a new technology- the more technically complex the innovation, the less attractive it may be to many farmers. For example, if the technology is divisible (as is the case with HYVs), the farmer is able to try out the innovation on a small scale. On the other hand, if the technology is ' lumpy' (as is the case with large machinery such as tractors and harvesters), small scale trials are not possible and the farmer may be more reluctant to adopt. The economic potential of the new technology- E.g in terms of yields, costs of production and profit. The characteristics of the farmer and the farming enterprise- the farmers' attitude to risk will have a bearing on the adoption decision. Age, experience and education, the factors comprising ' human capital\ may also determine the farmer's awareness and interest in the new technology, as well as his ability to implement it. Moreover the potential adopter may be confronted with constraints in terms of purchasing power, of access to credit and information, and of poor communication links with product and input markets.

87. Technology adoption in developing countries Agricultural technology has direct impacts on the rural poor by increasing incomes of farmers, many of whom may be poor. Care must be taken during development and subsequent release of new technologies to ensure that they are accessible to poor producers, but evidence shows that in many cases poor producers benefit directly. Indirect benefits to the poor from growth in agriculture come from two primary sources: increased demand for labor and increased supply of food, causing food prices to drop.

88. Institutional Constraints on Agricultural Development and Remedial Policies Here we discuss constraints imposed on agricultural development by defects in the institutions controlling the distribution of land, access to agricultural capital and credit and the competitive structure of agricultural markets We consider the motives for and possible effects of reforming policies in these areas We examine the system of landownership and land tenure The meaning and motives for land reform The possible benefits and costs of land reform Its effect on farm output and marketed surplus Limitations of land reform And cooperative farming and tenancy reform as policy alternatives to individual farm ownership

89. Land Ownership and Tenure Systems Systems of agricultural land ownership and tenure are both diverse and complex We can distinguish two systems into traditional and modern systems Under traditional systems the ownership of land could be either communal or private Under communal or tribal ownership farmers have individual rights of cultivation but not necessarily exclusive use of land e.g. grazing rights are often held in common Under private ownership, the rights of ownership and cultivation may either be exercised by the same person (owner farmer) or separately by landlords or tenants In the traditional mode , the landlord-tenant system has generally been feudal in character with tenants paying and landlords receiving rent

90. Modern Systems of Land Ownership Under modern systems of land ownership the dichotomy is capitalism versus socialism In the capitalist system land ownership is private with land owners exercising the option of either farming the land themselves or letting it to a tenant usually paying a fixed cash rent In the socialist model, the land is owned by the state , although the responsibility of cultivation is often given to cooperative groups or collectives The collective farmers are required to meet production norms and delivery quotas set by the state

91. What i s Land Reform? The use of the word land reform most commonly refers to the redistribution of landownership from traditional and feudal type landlords to their previous tenants or wage laborers In principle the meaning of land reform can be extended to cover any socially beneficial change in a country’s system of agricultural landownership or tenure arrangements For example, the change from a primitive system of communal land ownership to private ownership might yield substantial social gains in terms of more intensive use of land and a larger marketed surplus In the short run land reform may be economically and socially disruptive Time is needed to establish a new structure of agricultural production with supporting ancillary services such as credit, marketing and agricultural extension Thus in the short run there is bound to be some decline in agricultural production as an aftermath to land reform

92. Empirical Evidence of Land Reforms Empirical evidence of net benefits of land reforms are mixed Records indicate a variety of results ranging from successful to unsuccessful reforms with other cases undecided The group of countries with successful reforms include Egypt, Taiwan South Korea and Iran In all these countries an effective redistribution of land ownership was combined with improved agricultural productivity and higher output Unsuccessful group includes Mexico where the ejidos have lagged behind private farms in productivity and output growth Peru is another example where economic viability of small farms have been difficult to establish despite the formation of cooperatives In Bolivia and Iraq output decline was dramatic and persistent following land reforms The indecisive group includes Japan where successful first reform was followed by a second reform which worsened the problem of undersized farms .

93. Summary and Policy Conclusions The motives for land reform, as seen by its beneficiaries, derive primarily from the social and political aspirations of the rural population Farmers may have to be educated to see land reform as a means of improving their productivity and incomes The agricultural benefits of land reform depend on much more than the mere redistribution of land ownership A complete agrarian reform is needed entailing redistribution plus a complete package of supporting ancillary services Although the possible economic benefits of land reform include a larger agricultural output and higher farm income and a great marketed surplus of agricultural products , the realization of these benefits depends upon numerous factors These include the form and content of government policies Due to its disruptive character, land reform is virtually bound to result in some short term loss of agricultural output

94. Summary and Policy Conclusions The empirical evidence of the agricultural benefits of land reform reveals a mixture of successes and failures. A general failing of virtually all reforms is that very few of the benefits have reached the very small scale farmers and landless laborers. In very densely populated countries the agricultural area released by land reform may be insufficient to provide adequate sized farms for all rural families e.g. in RSA only 6% of land has been redistributed since the land reform began more than ten years ago. Thus rural unemployment and poverty cannot be eliminated by land reform alone. Strong government direction and leadership are needed to enact land reform legislation, ensure its implementation and provide its beneficiaries with adequate services and ancillary services to induce higher investment, output and farm income as well as a larger marketed surplus of agricultural output .

95. Topic 6: Farming systems

96. Farming Systems A farming system is defined as a population of individual farm systems that have similar resource bases, enterprise patterns, household livelihoods and constraints, and for which similar development strategies and interventions would be appropriate. The classification of the farming systems of developing regions has been based on the following criteria: Availability of natural resource bases such as water, land, grazing areas and forest; climate, of which altitude is one important determinant; landscape, including slope; base farm size, tenure and organization; and Dominant pattern of farm activities and household livelihoods crops, livestock, trees, aquaculture, hunting and gathering, processing and off-farm activities.

97. Identification of dvpt issues using Farming Systems Research (FSR) FSR is an approach for generating appropriate technologies for studying existing farming systems and involving the technology users- usually the small farmers in the planning and evaluation process. Firstly, the farmer and his family are rational in their decision-making. Secondly, the production systems of small farmers embody an integrated set of husbandry practices that have developed over centuries so that these systems are stable, complex and very sensitive to the ecological, biological and socio-economic environment. Thirdly, a farming system belongs to the goal-setting and purposeful category of systems and its direction is determined by the farmer and his family.

98. Identification of dvpt issues using Farming Systems Research (FSR) FSR is an interactive stepwise process that has three actors- the researchers, extension agents and farmers - in the conduct of the four basic phases: Characterization- involves an understanding of the structural and functional relationships of current farming systems in specific geographical areas and an identification of the endogenous and exogenous constraints to achieving farmers’ goals; Design of technological alternatives involves an ex-ante evaluation and selection of strategic interventions, components, inputs and/or practices that results in a well defined and effective agenda for follow-up research with respect to farm monitoring, component experimentation and/or technology testing; Testing involves evaluation, on farmers' fields and under partial or exclusive farmer management, of the assumptions, decisions and expected performance of the technological alternatives as designed in the previous phase; Diffusion usually refers to the dissemination of tested innovations to credit and extension personnel or to small groups of farmers, usually through intensive assistance. Large-scale adoption and impact on productivity is more difficult to achieve.

99. Agricultural development policies Good policy requires identifying them , asking which ones can be directly attacked by making markets work more effectively and which cannot. There is need to identify which market failures can be ameliorated through non market institutions (with government perhaps taking instrumental role in establishing these non market institutions). Agricultural policy can be defined as the set of decisions taken by government that influence the prices farmers confront in the markets which determine their incomes.

100. The political framework of agricultural policy decisions Why do governments act as they do? The level of farm revenues is determined in part by the prices at which sales are made in markets for agricultural commodities The prices which farmers must pay for farm inputs help to determine their costs thus in combination with revenues, the net money value of their incomes from farming The real value of farm incomes in turn is determined by the prices which farmers must pay for consumer items

101. The political framework of agricultural policy decisions Research throughout the developing world suggests that government policy tends to be antithetical ( not supportive or eventually work against) to the interests of farmers Governments tend to lower prices that farmers receive for produce Governments tend to shelter domestic manufacturers from competition thereby raising the prices farmers must pay for consumer items While governments subsidize farm inputs, these tend to be captured by large farmers and not the majority of the poor farmers Incomes of those farmers are thus adversely affected by agricultural policies of third world governments

102. The political framework of agricultural policy decisions Government policies tend to weaken production incentives for farmers When governments do offer positive incentives for increased production they tend to do so by lowering costs rather than by increasing gross revenues That is by subsidizing the prices of farm inputs rather than raising prices of farm commodities

103. Sectoral planning A much more sophisticated approach to development planning is to use some variant of the inter-industry or input-output model , in which the activities of the major industrial sectors of the economy are interrelated by means of a set of simultaneous algebraic equations expressing the specific production processes or technologies of each industry. All industries are viewed both as producers of outputs and users of inputs from other industries. For example, the agricultural sector is both a producer of output (e.g., wheat) and a user of inputs from, say, the manufacturing sector (e.g., machinery, fertilizer). Thus direct and indirect repercussions of planned changes in the demand for the products of any one industry on output, employment, and imports of all other industries can be traced throughout the entire economy in an intricate web of economic interdependence. Given the planned output targets for each sector of the economy, the inter-industry model can be used to determine intermediate material, import, labor , and capital requirements with the result that a comprehensive economic plan with mutually consistent production levels and resource requirements can, in theory, be constructed.

104. Topic 7: Poverty Alleviation & Agriculture in the international economic context

105. Poverty Poverty has many faces and is one of the major challenges facing the development community. Poverty is widely understood to be an inability to meet basic needs, and the poor tend to be hungry, are without adequate shelter, and have limited access to health care. The poor lack opportunity, and their powerlessness often lead to hopelessness and despair. Trends since the early 1980s point to a decrease in global poverty, but stark challenges remain; in 2005, an estimated 1.4 billion people — about one fourth of the world’s population — lived in extreme poverty and efforts to reduce poverty must be constantly refined.

106. Poverty & Economic Development A variety of factors contribute to poverty but inadequate income is certainly the most important underlying cause. The World Bank estimates that redistributing just 2 percent of the world’s output would eliminate most poverty and malnutrition. But such redistribution would be feasible only if those who now go hungry had some way to obtain that food, or something to offer in exchange. If people, for whatever reason, produce too few goods and services, they lack income to buy food and they go hungry. Poverty is a key characteristic of traditional agriculture which is also the predominant form of agriculture in LDCs.

107. Poverty & Economic Development The major causes of poverty include: Inadequate access to land and capital for the majority of the farmers and technological backwardness In order to defeat poverty we need to tackle the two issues above Agriculture per se is fraught with risks and uncertainties particularly in fragile LDC economies hence the need for policy measures to reduce the risks and uncertainties Development theory postulates a progression from dominant primary production in agriculture to dominance in manufacturing industry Thus poverty reduction or elimination is central to Economic Development

108. Poverty Alleviation Strategies Raising Incomes Lifting vulnerable people out of poverty is central to any long-term strategy to alleviate malnutrition in the world. For subsistence farmers, this strategy implies raising productivity, increasing access to land, or creating opportunities to migrate to off-farm employment. For the population in general, it implies a need for increased employment opportunities combined with higher productivity per person. Agricultural Production Agricultural productivity is particularly important for the incomes and nutritional status of the poor, because in most developing countries the poorest people have no choice but to be farmers, and they feed themselves and their families using their own labor and available land. Increased productivity for those farmers not only raises their incomes and purchasing power, but can also lower the price of food for those who must buy it to feed their families, making it possible for the poor to purchase larger quantities

109. Poverty Alleviation Strategies Safety Nets As noted earlier, much poverty is transitory and caused by fluctuations in income. These fluctuations, in turn, can have dramatic impacts on nutrition, and they can lead to longer-term poverty because households often invoke harmful coping mechanisms to deal with them. Safety net programs, such as cash and in-kind transfers, public works programs, conditional cash transfers, and fee waivers for health and education, can distribute wealth to the most needy and provide insurance against risks. By protecting vulnerable farmers against the adverse consequences of risk, safety nets allow them to make better investment decisions and adopt new technologies and production practices (such as new seeds and fertilizers) that increase mean incomes. Safety nets need to be properly targeted and efficiently administered to avoid waste, but much has been learned in recent years about their design and implementation. Many countries have now successfully implemented them.

110. Poverty Alleviation Strategies Food Intervention Programs Food price subsidies, supplementary feeding programs, and food fortification can each help reduce nutritional deficiencies Political, Social, and Educational Changes Political stability can help alleviate both famine conditions and chronic hunger. International Actions International actions can help alleviate poverty, famine, and chronic malnutrition. E.g opening of markets in more developed countries, and debt relief

111. Food and the Environmental Nexus Quote: “ Much of the environmental degradation witnessed today is primarily due to two groups of people- The top billion richest and the bottom billion poorest” ( Nafis Sadic Executive Director, United Nations Population Fund 1991). The environment has become an important issue to economists over the past few decades as far as the success of the development efforts are concerned. The interaction between poverty and environmental degradation can lead to self perpetuating process of communities inadvertently destroying or exhausting the resources on which they depend for survival. Environmental degradation can also detract the pace of economic development by imposing high costs in developing countries through health related expenses and reduced productivity of resources Development economists believe and acknowledge that environmental considerations should form an integral part of policy initiatives.

112. Food and the Environmental Nexus Seven basic issues define the environment and development The concept of sustainable development and linkages between the environment i.e. Development plans should incorporate environmental accounting into policy Population and resources, slow pop. growth will ease pressure on environment For environmental policies to succeed 3 rd World countries must address issues of landlessness, poverty and lack of access to institutional resources Reduction in environmental destruction will lead to economic growth which will enhance incomes of the poor. The increased accessibility of agricultural inputs to small farmers and the introduction of sustainable methods of farming will help create attractive alternatives to current environmentally destructive patterns of resource use Land augmenting investments can greatly increase the yields from cultivated land and ensure future food self sufficiency

113. Food and the Environmental Nexus As total population grows and incomes rise, the net global environmental degradation is likely to worsen. Some trade offs will be necessary to achieve sustainable world development Research reveals that the urban environment appears to worsen at a faster rate than urban population size increases so that the marginal environmental cost of additional residents rises over time The most pressing environmental challenges in developing countries in the next few decades will be caused by poverty. There will be health hazards created by lack of access to water, sanitation, air pollution, deforestation and severe soil degradation and loss of biodiversity.

114. Sustainable Agricultural Development “…poverty compels people to extract from the ever shrinking remaining 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.” Schramm and Warford (1989) The World Commission on Environment and Development has defined sustainable development as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” Thus, the term “development” encompasses not only an economic growth component, but distributional components, both for the current population and for future generations.

115. Sustainable Agricultural Development Sound environmental management is essential for sustained agricultural and economic development. Yet environmental degradation is evident throughout the developing world. Soil erosion, silting of rivers and reservoirs, flooding, overgrazing, poor cropping practices, desertification, salinity and water-logging, deforestation, energy depletion, loss of biodiversity, and chemical pollution have become major problems. Poverty, high rates of return to capital, debt problems, rapid population growth, and misguided public policies conspire against solutions. Environmental problems are interrelated, and understanding their causes requires sorting out complex physical, economic, and institutional linkages. Technical solutions are needed for each of these problems, but economic and institutional changes must provide the incentives for behavioral change. As incomes grow, population pressures are reduced, and the demand for environmental protection increases. Economic development means more resources in the long run for addressing environmental problems.