LUMS

6. Agriculture and Development

Development Economics

Hadia Majid
Syllabus
• Module 6

Readings
• Required - Todaro: Chapter 9; Sub-sections of Perkins
Chapter 16 (identified in the slides)
• Supplementary – Perkins: Chapter 16 (all sections
aside from those that are required)
Economist “Good governance in poor countries would
end hunger faster than rich-world aid” June 13, 2002
http://www.economist.com/node/1177418
Introduction
• Economic stagnation of outlying rural areas
– Despite progress, 2 billion people in the developing world have a
meager and inadequate existence in agricultural pursuits
– Over 3.3. billion people lived in rural areas in 2007, a quarter of them in
extreme poverty

6. Agriculture
– More than half of the population lives in rural areas in Latin American
and Asian nations and 65% in sub-Saharan Africa

• Over two-thirds of the world’s poorest are located in rural areas

and engaged in subsistence agriculture
– Their behavior often seems irrational to many observers who until
recently had little comprehension of the precarious nature of
subsistence living
• Core problems of widespread poverty, growing inequality
and rapid population growth all originate in the stagnation
and retrogression of economic life in rural areas
– Sustainable development must include rural areas and the
agricultural sector

6. Agriculture
• Putting food on the table does not mean that everybody will
get a fair share. In South Asia—notably India, Pakistan and
Bangladesh—half of all young children are malnourished,
compared with a third in poorer sub-Saharan Africa.
– Women in South Asia have less power at home, relative to
men, than do African women. So they get less to eat, as
do their children, both in the womb and in later life.
• Since most of the people in poor countries make their living
off the land improving their welfare requires
– Raising farmer productivity BUT creating mechanized
large-scale farms may make majority of population worse
off
– Improving the prices they receive

6. Agriculture
• Traditionally, agricultural sector has been assumed to play a
passive and supportive role
– Primary purpose was to supply sufficient low-priced food
and manpower to the expanding industrial economy

• Agricultural sector and the rural economy must play an

indispensable part in the overall strategy of economic
progress
Agricultural Growth: Past Progress and Current
Challenges
• Agricultural production has kept pace with world population
growth
– Output gains in the developing world have led the way

• Low-income countries

6. Agriculture
– Have highest share of labor force in agricultural: sometimes as much as
80-90%
– Share of agriculture in GDP is lower: half of the value of output

• Both shares fall as GDP per capita rises

– Sometimes the share of labor in agriculture declines sharply even when
GDP per capita does not increase much e.g. Nigeria and Brazil
• Urbanization is proceeding rapidly even when per capita income is falling or
not rising much
– Case of China: growth has been extremely rapid but the fall of the
share of labor in agriculture has been unusually low
• Restrictions on rural-urban migration
• In developing countries
– Agricultural employment is much higher than agricultural output =>
relatively low levels of labor productivity compared with those in
manufacturing and commerce

6. Agriculture
• In a majority of African countries, average per capita calorie
intake has now fallen below minimal nutritional standards
– Calls for a new green revolution in Africa like the successful one in Asia

• One major reason for the poor performance of agriculture in

low income regions has been the neglect of the sector in the
development priorities of their governments
– Rural neglect and emphasis on urban growth => rural-urban migration
Key Issues
• How do we transition from subsistence to commercial
agriculture?

• How do we get the role of the government right?

6. Agriculture
– Many of the early interventions did more harm than good
• In an attempt to keep urban food prices low, farmers were required to sell at
a low price to state marketing boards
• Production subsidies are costly and inefficient

• Market failures in the sector are quite common and include

– Environmental externalities
– Public good nature of agricultural R&D and extension services
– Information asymmetries in product quality
– Monopoly power in input supply
Structure of Agrarian Systems
• Agriculture-based countries
– Agriculture is a major source of economic growth mainly because
agriculture makes up a large share of GDP: 32%

• Transforming countries
– Share of the poor who are rural is very high (almost 80%) but agriculture

6. Agriculture
contributes only a small share to GDP growth (7% on average)

• Urbanized countries
– Rural-urban migration has reached the point where nearly half or more of
the poor are found in the cities, and share of agriculture in GDP is even
lower

• Position of countries in these groups is not stagnant

• Regional disparities can be quite large within countries

Peasant Agriculture
• Various historical circumstances led to concentration of large
areas of land in the hands of a small class of powerful
landowners
– Latin America and Asian subcontinent
– Lives, rural structure and institutions are markedly different

6. Agriculture
• Asia: fragmented and heavily congested dwarf parcels of land
– Too many people crowded onto too little land
– Land distributed more equally than in Latin America but still substantial
levels of inequality
– Traditional Asian agrarian structure before colonization organized
around the village
• Important resources belonged to the tribe or community
– Arrival of Europeans changed property rights
– Contemporary landlords in India and Pakistan are usually absentee
owners and turn over working of the land to sharecroppers and tenant
famers
• Creation of individual titles made possible the rise to power of
the moneylender
– PR for land => negotiable asset can be offered by peasants as security
for loans

6. Agriculture
– Most loans paid kind at very high rates of interest
• By charging exorbitant interest rates or by inducing peasants to secure larger
credits than they could manage moneylenders able to drive peasants off
their land and selling the farmland to rich and acquisitive landlords

• Ultimate impoverishment of the peasantry consequence of

– Process of fragmentation
– Economic vulnerability
– Loss of land to rich and powerful landlords
• Latin America: agriculture dualism latifundio-minifundio
– Latifundio are very large landholdings which provide employment to
more than 12 people. Minifundio are the smallest farm which are too
small to provide employment for a single family (two people)
– 1.3% of landowners hold 71.6% of the land under cultivation
– Considerable amount of production on family owned and medium-
sized farms

6. Agriculture
• Relative economic inefficiency on the latifundios
– Wealthy landowners often value holdings not for their potential
contributions to national agricultural output but for the power and
prestige that they bring
– Transaction costs especially the cost of supervising hired labor is much
higher than the low effective cost using family labor

• Need more than just technology adoption/improvement to

increase agricultural productivity
Land Reform (Perkins)
• Politics of land reforms
– To prevent uprising: Mexico
– In case of a general revolution by the peasants: China

6. Agriculture
• Reform of rent contracts to strengthen the property rights of
tenants

• Rent reduction to incorporate a ceiling on the percentage share

of the crop
– If the ceiling is sufficiently low impact on tenant welfare and the surplus
available for investment can be substantial

• Land to the tiller (former tenant) with compensation to the

landlord for loss of land
Land Reform and Income Distribution

• Has major effect on distribution of income in rural

areas only if land is taken from landlords without
anything close to full compensation
– However, if receive compensation through general tax

6. Agriculture
revenues then former tenant’s income share may rise
provided that he doesn’t bear the burden of the tax

• Best known successful land reforms have commonly

involved little or no compensation
Cultivation in Africa
• Subsistence farming on small plots of land is the way of life for the
majority of African people living in agriculture-based economies
– Majority of farm families in tropical Africa still plan their output
primarily for their own subsistence

6. Agriculture
• Three major characteristics
– Importance of subsistence farming in the village community
– Existence of some, though rapidly diminishing, land in excess of
immediate requirements
• Permits general practice of shifting cultivation
• Reduces the value of land ownership as an instrument of
economic and political power
– The rights of each family, both nuclear and extended, in a
village/community to have access to land and water in the
immediate territorial vicinity
Historical Factors Leading to Low-productivity
Farming in Africa
• Use of traditional tools => only a small area can be cultivated
– Use of animals made impossible due to lack of fodder and disease => must
use human labor

• Small area needs to be intensely cultivated => rapidly diminishing

6. Agriculture
returns to increased labor inputs
– Shifting cultivation method is used

• Labor is scarce during the busiest parts of growing, planting and

weeding seasons, at other times labor is underemployed
– Planting time is dependent on rain and much of Africa has only one
extended rainy season

• As population densities increase feasibility of shifting cultivation has broken

down
Role of Women
• Women do most of the agricultural work especially in Africa

• Diversity of women’s duties

– Cultivate food for household

6. Agriculture
– Perform household chores including processing and cooking of foods
• Provide food security for household
– Provide labor for cash crop production
– Raise and market livestock
– Generate additional income through cottage industries
– Collect firewood and water

• Limited bargaining power and time consuming nature of tasks

=> women typically work longer hours than men
Transition from Subsistence to Specialized
Commercial Farming
• Three broad stages in the evolution of agricultural
production
– Pure, low-productivity, mostly subsistence-level peasant farm:
Africa
– Diversified or mixed family agriculture where a small part of the

6. Agriculture
produce is grown for consumption and a significant part for sale:
Asia
– Modern farm which is exclusively engaged in high-productivity
specialized agriculture geared towards the commercial market:
Developed

• Agricultural modernization in mixed-market developing

countries involves gradual but sustained transition from
subsistence to diversified and specialized production
Risk Aversion, Uncertainty, and Survival
• On the classic peasant subsistence farm (sub-Saharan Africa,
pockets in Asia and Latin America)
– Most output is produced for family consumption
– Output and productivity are low
– Simplest traditional methods and tools are used

6. Agriculture
– Law of diminishing returns is in operation as more labor is applied to
shrinking or shifting parcels of land
– Failure of rains, appropriation of land, appearance of the moneylender
are banes to the peasant’s existence
– Labor is underemployed for most of the year
– Peasant usually cultivates only that much land which can be cultivated
without hired labor
– Technological limitations, rigid social institutions, fragmented markets
and communication networks between rural and urban discourage
higher levels of production
– Cash that is generated usually comes from nonfarm wage labor
• Subsistence agriculture can be highly risky and uncertain especially since
lives are at stake
― In regions where farms are extremely small and cultivation is dependent
on the uncertainties of variable rainfall, average output will be low and in
poor years, the farmer and his family will be at risk of starvation (Fig

6. Agriculture
9.5)

• When risk and uncertainty are high a small farmer may be reluctant to shift
from traditional technology and crop pattern that he has come to know to a
pattern that promises higher yields but entails greater risk
― Prefer a technology which combines low mean per-hectare yield with
low variance to those that provide higher mean but also with higher
variance (Fig 9.6)
Why Have Interventions Failed?
• Many programs aimed to raise agricultural productivity in
Africa have failed because they do not provide adequate
insurance (financial credit and physical ‘buffer’ stocks) against
the risk of crop shortfalls

6. Agriculture
• In parts of Asia and Latin America peasant farmers did not
take advantage of ‘obvious’ economic opportunity because
― Landlord secured much if not all of the gain
― Moneylender captured the profits
― Government’s ‘guaranteed’ prices were never paid
― Complementary inputs (fertilizers, pesticides, water) were never made
available or their use was more problematic than outsiders understood
― Peasants had concerns about eviction or expropriation therefore little
incentive to invest
Sharecropping and Interlocking Factor Markets
• Risk aversion in the presence of high land inequality helps explain the
prevalence of sharecropping
– Farmer is paid only part of his marginal product => inefficiency
– Farmer who owned his farm would work until value of MPL= wA, sharecropper
receives only a fraction of his effort

6. Agriculture
Output per unit of Labor

VMPL
γVMPL
wA = alternative wage

Ls Lf = Efficient amt. of Labor effort

Labor Input
• But profit-maximizing landlords would establish contracts where tenant
lived up to his part of the bargain
– Monitoring of effort?

• If landlords offer a tenant a choice then only the low-productivity people

6. Agriculture
may choose to enter share-cropping contract while high ability ones would
take up the rental contract i.e. screen applicants

• Sharecropping may be efficient after all

– Makes the best out of an inherently risky situation for both parties

• Sharecropping exists in a socio-economic framework of extreme inequality

and market failure
– Interlocking factor markets: land, labor, credit, ultimate consumer
Transition to Mixed and Diversified Farming
• Cannot transform traditional agriculture to commercial farming immediately
– Attempts to introduce cash crops indiscriminately on subsistence farms
have often resulted in loss of land to moneylenders or landlords

• Diversified or mixed farming is an intermediate step

– Staple crop no longer dominates farm output

6. Agriculture
– Use of better seeds, fertilizer, irrigation etc. to raise yields of staple
while freeing farmland for cash crops
– New cash crops such as fruits, coffee, tea are established together with
simple animal
• New crops may be introducing during the staple crop’s off-season
– Diversified farming can minimize impact of staple crop failure

• Success depends on
– Farmer’s ability and skill in raising productivity
– Whether he has reasonable access to credit, fertilizer, crop information,
water, if he receives a fair market price for his output etc.
Modern Commercial Farming
• Specialized farm represents the final and most advanced stage
– Most prevalent type of farming in advanced industrial nations

• Provision of food for family with some marketable surplus is

6. Agriculture
not the goal
– Pure commercial profit becomes the criterion of success
– Maximum per hectare yields derived from synthetic and natural
resources are the main objective of the farm
– Emphasis on the cultivation of one crop
– Use of capital-intensive, laborsaving techniques of production
– Reliance on economies of scale to reduce unit costs and maximize
profits
Strategy of Agricultural and Rural Development

• Improve small-scale agriculture

– Technology and innovation: allow for sustained
improvements in output and productivity

6. Agriculture
– Institutional and pricing policies: provide the
necessary economic incentive
– Adapting to new opportunities and new
constraints: environmental problems due to global
warming and climate change
Conditions for Rural Development
• Land reform: farm structures and land tenure patterns must be adapted to
increase food production and allow progress against poverty

• Supportive policies: access to credit and inputs to enable small cultivators

to expand their output

6. Agriculture
• Integrated development objectives: rural development encompasses more
than just the small farmer. Need to
– Improve rural life
– Reduce inequality (within rural and rural-urban)
– Focus on environmental sustainability
– Develop the capacity of the rural sector to sustain and accelerate pace
of improvements
Questions for Review
• What kind of support policies should the government adopt to reduce rural
poverty?

• What is the ‘mechanical package’ of agricultural technology? Use a diagram

and explain what type of economies would find the mechanical package to

6. Agriculture
be the most cost efficient.

• Under what conditions would the failure of small-farmers to adopt

agricultural technology be termed irrational?

• When is land reform likely to have the greatest impact on agricultural

productivity? Would technology adoption rise and output improve as
property rights become more secure?