Agriculture plays an important role in development, though early theories viewed it as passive. The green revolution showed agriculture's potential as a growth sector. Agricultural development is now seen as key. Agriculture employs most in developing countries and accounts for a large share of GDP, though this declines with development. Developing countries can be categorized based on agriculture - agriculture-based, transforming, and urbanized. Agrarian systems differ across regions, with Latin America characterized by latifundio and minifundio dualism, Asia by fragmented smallholdings, and Africa by subsistence farming. Women play a vital role in agriculture globally. Agricultural production evolves through primitive, transitional, and commercial stages.

1. Chapter 4
Agriculture and Economic Development
4.1. Agricultural Progress and Rural Development
• Agriculture employs a majority of the labor force in most developing
countries.
 The agriculture sector has been integral to any thinking about
development.
• The early classical theory /traditionalists viewed the agriculture
sector as characterized by low productivity, traditional technology,
and decreasing returns (fixed land size with increasing labor forces).
 Agriculture has been assumed to play a passive and supportive role.
 Its primary purpose was to provide sufficient low-priced food and
employment and providing manpower to the expanding industrial
economies.
 According to this views, the importance of agriculture was expected
to decline as development advanced.
 Productivity increase and higher return to scale in the industrial
sector when the economy develops.
1

2. • Therefore, development requires systematic reallocation of
factors of production from the agriculture sector to a modern
industrial sector with higher productivity and increasing
returns.
The active role of agriculture in growth and development
• The view that agriculture plays only a passive role in
development was swept aside by the green revolution in Asia
during the late 1960s and early 1970s.
Green revolution: the increase in grain production associated
with the scientific discovery of new hybrid seed varieties of
wheat, rice, and corn that have resulted in high farm yields in
many developing countries.
 The transformation of traditional agriculture into a modern
sector revealed the potential of agriculture as a growth
sector. 2

3. “Agricultural development is now seen as an important part of
any development strategy.
• Lewis’s seen agricultural sector fueling industrial
expansion by means of its cheap food and surplus labor
only. But,
• Simon Kuznets indicated that agriculture has four
contributions to economic development:
a. Product contribution = supply of output for consumption &
supply of inputs for industries , such as textile and food
processing
– food to meet basic nutritional needs of the
population
– raw materials to help the industry
b. Foreign-exchange contribution = using agricultural export
revenues to import capital goods
3

4. c. Market contribution = an increase in rural incomes create
more demand for consumer products of manufacturing sector.
d. Factor market contribution
- Labour contribution = workers not needed on farms after an
increase in agricultural productivity work in industry
- Capital contribution = some farm profits could be invested
in industry
• Today, most development economists share the consensus
that besides playing a passive role, the agricultural sector
and the rural economy play an indispensable role in any
overall strategy of economic progress, especially for the
low-income developing countries.
 An agriculture and employment based strategy of economic
development requires three basic complementary elements:
4

5. 1. Accelerated agricultural output growth through technological,
institutional, and price incentive changes designed to raise the
productivity of small farmers
2. Increased domestic demand for agricultural output derived
from an employment-oriented urban development strategy
3. Diversified, non-agricultural, labor-intensive rural development
activities that directly and indirectly support and are supported
by the agriculture
• Agricultural and rural development are considered as the sine
qua non (essential condition or prerequisite) of national
development.
 Integrated rural development: the broad range of rural
development activities, including small-farmer agricultural
progress, the provision of physical and social infrastructure, the
development of rural non-farm industries, and the capacity of the
rural sector to sustain and accelerate the velocity of these
improvements over time.
5

6. • Although agriculture employs the majority of the LDC labor
force, it accounts for a much lower share of total output.
Output and employment contribution of agriculture, 1950-
1995
6

7. • As countries develop, the shares of GDP and labor in
agriculture tend to decline, but with many idiosyncrasies.
7

8. Why do the shares of GDP and labor in agriculture decline
with economic development process ?
• Inelastic income elasticity of demand for food
 As per-capita income rises, the proportion of household
income spent on food declines relative to other products.
 As household demand for food declines in relation to other
products, relative prices of foods decline, other things equal.
 This in turn reduces returns to factors used in agricultural
production, causing a net migration of labor and capital to
other sectors.
 Shares of GDP and labor in agriculture decline over the
economic development process.
8

9. • Agricultural production continues to rise around the world
keeping pace with the rising population. But progress has
been very uneven.
Cereal Yields by World Region, 1960-2005
9

10. Reasons for Poor Performance of developing
country’s agricultural sector
Lack of investment in
• Human capital (education, nutrition, health)
• Social capital (roads, homes, electricity, irrigation)
• Physical capital (mechanical inputs, storage rooms)
• Technological advancement: (high yield seed variety, better
planting methods)
Unequal land distribution
– Large and powerful landowners
– Small family farmers and peasants
– Sharecroppers, landless peasants, and farm workers
10

11. Market Failures and the Need for Government Policy
• The historical misplaced emphasis on rapid industrialization
and the neglect of agriculture in development led to poor
performance of agriculture in low-income countries.
• Agriculture is believed as a perfectly competitive activity,
but this does not mean that there are no market failures and
no role for government.
• Market failures in agriculture sector are quite common and
include :
- environmental externalities
- agricultural research and extension services –have public
good character
- economies of scale in marketing of agricultural product
- information asymmetries in agricultural product quality
- monopoly power in agricultural input supply
11

12. What is the proper role for government?
• Extreme government interventions in agriculture are inefficient and costly.
• Government has been relatively effective in the market failure areas.
• Since majority of the world’s poor are farmers, government has a necessary
role in poverty alleviation.
 Poverty prevents farmers from taking advantage of opportunities
that could help them come out of poverty.
Lacking collateral⇒ lacking credit ⇒ taking children out of
school to work ⇒transmitting poverty across generations
Lacking health and nutrition ⇒unable to work ⇒low-
productivity .
lacking information and missing markets ⇒they cannot get
insurance ⇒cannot take what might seem favorable risks for fear
of falling below subsistence.
• It is impossible to escape from poverty traps without government
assistance. 12

13. 4.2. The Structure of Agrarian Systems in the Developing
World
Three types of developing countries based on agriculture:
1. Agriculture-Based Countries: agriculture is a major source
of economic growth (32% of GDP growth on average) and
it makes up a large share of GDP.
- More than two-thirds of the poor of these countries live in
rural areas.
2. Transforming Countries: the share of the poor who are rural
is very high (almost 80% on average) but agriculture
contributes only a small share to GDP growth (7% on
average).
3. Urbanized Countries: nearly half or more of the poor are
found in urban areas, and agriculture tends to contribute even
less to output growth.
13

14. Agriculture’s Contribution to Growth and the Rural Share in
Poverty in Three Types of Countries
14

15. • In many cases, the position of countries within these groups
is not stagnant.
 Many countries that were in the agriculture-based category
moved to the transforming category in recent decades, like
India and China.
Peasant Agriculture in Latin America, Asia, and Africa
Agrarian system is the pattern of land distribution,
ownership, and management and also the social and
institutional structure of the agrarian economy.
• In Latin America, Asia and Africa, agrarian structures are
not only part of the production system but also a basic
feature of the entire economic, social, and political
organization of rural life.
There are 3 agrarian systems in developing world:
15

16. 16
The Latifundio-Minifundio dualistic pattern in Latin
America
The fragmented and heavily congested dwarf land
holdings in Asia
Extensive cultivation patterns in Africa
Agrarian patterns in Latin America: progress and
remaining poverty challenges
• A pattern of agricultural dualism known as latifundio-
minifundio has existed in Latin America since colonial times
and is still widespread in a substantial part of the region.
Latifundio : is very large landholding found particularly
in the Latin American agrarian system, capable of providing
employment for more than 12 people, owned by a small
number of landlords, and involving a unequal share of total
agricultural land.

17. Minifundios: are the smallest farms.
 They are too small to provide employment for a single family (2 workers).
 They could provide work for fewer than two people.
• The degree of land ownership inequality (thus, income inequality) is very high in
Latin America.
• Latifundios and minifundios are not the only Latin American’s agricultural land
holdings.
• There are family farms and medium-size farms.
Latifundios:
• Very large landholdings
• Commercial farming & advanced farm technology
• Employing more than 12 worker
Minifundios:
• Small family farms (a few workers)
• Subsistence farming & primitive technology
• Low standard of living
Problems:
• Land concentration: 71.6% of land owned by 1.3% of landowners
• Inefficiency of latifundios
• Subsistence of minifundios
Family farm: is a farm plot owned and operated by a single household.
 It provides work for 2 to 4 people.
Medium-size farm: is a farm employing 4 to 12 workers (just below the latifundio).
17

18. • These intermediate farm organizations use a more efficient
balance between labor and land, and studies show that they have
a much higher total factor productivity than either latifundios or
minifundios.
• Farming the fertile land on the latifundios is relatively
economically inefficient. Why?
• The wealthy landowners often value these holdings as a power
and prestige (it is not for their potential contributions to
national agricultural output)
• Much of the land is left idle or farmed less intensively than
smaller farms.
 Latifundio transaction costs (especially, cost of supervising hired
labor) are much higher than the low effective cost of using
family labor on family farms or minifundios.
• Therefore, raising agricultural production and improving the
efficiency of Latin American agrarian systems will require
much more than direct economic policies that lead to the
provision of better seeds, more fertilizer, less distorted factor
prices, higher output prices, and improved marketing facilities.
18

19.  It will also require a reorganization of social and
institutional structures in rural areas.
• Many minifundio owners remain in poverty.
• Many latifundio owners continue to operate below their
productivity potential.
 As a result, a more dynamic sector, including some larger
farms, has emerged. Efficient family and medium-size
farms are found throughout the region.
At an aggregate level the agricultural sector in Latin
America is doing well.
• However, extreme rural inequalities still persist.
19

20. Fragmentation and subdivision of Peasant
Land in Asia
• The major agrarian problem of Latin America
is too much land is under the control of too
few people.
• The basic problem in Asia is too many people
crowded on too little land.
20

21. Agricultural Dualism: Asia
Commercial farming:
• Very large landholdings
• Massive government subsidies
Subsistence farming:
• Small family farms
• Sharecroppers and landless peasants
• Little or no government support
• Colonial heritage of cash crop production (e.g.,
cotton, peanuts)
• Progressive introduction of monetized transactions
• Powerful “absentee” landowners residing in large
cities with political & economic influence 21

22. Agricultural Dualism: Asia
• Moneylenders and loan sharks
– Lend money for buying seeds and fertilizer
– Charge exaggerated interest rates (20-50%)
– Hold land as collateral
– Take over the land in case of loan default in poor-crop
years
– Become landowners themselves
Problems:
• Poverty
• Land and income disparity
• Rapid population growth
• Growing number of landless peasants
• Lack of government programs helping small farmers
• Massive R-U migration
22

23. • The land is distributed more equally in Asia than in Latin
America but still with substantial levels of inequality.
• Gunnar Myrdal identified three major interrelated forces
that shaped the traditional pattern of land ownership into its
present fragmented condition:
(1) Colonial rule
• The colonial rule established private property rights to land
which led to land tenure systems.
(2) Power of the money lender
• The creation of individual titles to land gave rise to money
lender.
• Land became a negotiable asset and used as a security to
get loans. In case of default, it could be given up and
transferred to the money lender. 23

24. (3) Rapid growth of Asian populations
• An increase in population leads to shrink in land holdings.
 So, production falls below the subsistence level, and chronic
poverty becomes a way of life for many.
 Peasants are forced to borrow even more from the money
lender at higher interest rates.
 Most cannot repay these loans.
 They are forced to sell their land and become tenants with
large debts.
 Because land is scarce, they are forced to pay high rents or
sharecrop on unfavorable terms.
 Because labor is abundant, wages are extremely low.
 Thus, peasants were trapped in a vise of chronic poverty
from which here is no escape. 24

25. • Thus many rural Asians are gradually being transformed
from small proprietors to tenant farmers and sharecroppers,
then landless rural laborers, then jobless vagrants, and
finally migrant slum dwellers on the fringes of modern
urban areas.
• At the same time, other farmers have benefited from the
enormous productivity gains resulting from the green
revolution.
Tenant farmer : is the one who farms on land held by a
landlord and therefore lacks ownership rights and has to pay
for the use of that land.
Share cropper: is a tenant farmer whose crop has to be shared
with the landlord as the basis for the rental contract.
25

26. Subsistence Agriculture and Extensive Cultivation in
Africa
Subsistence agriculture is an agriculture in which crops are
produced mainly for personal consumption. Not for commercial aims.
African agriculture systems are dominated by three major
characteristics:
1. The importance of subsistence agriculture in the village
community
2. The existence of some land in excess of immediate
requirements, which permits a practice of shifting
cultivation. However, as population size increases, the
feasibility of shifting cultivation will be broken down.
3. The rights of each family in a village to use a common
property such as land and water, excluding families that do
not belong to the community from using such property.
26

27. Agricultural Dualism: Africa
Commercial farming:
• Very large landholdings
• Massive government subsidies
Subsistence farming:
• Small family farms
• Primitive technology
• Large areas of unusable land
• Massive underemployment, but labor shortage in crop
season
Problems:
• Poverty
• Land and income disparity
• Rapid population growth
• Lack of government programs helping small farmers
• Massive R-U migration
• Rapid deforestation and desertification 27

28. • The low-productivity of subsistence African agriculture
results from a combination of three historical forces
restricting the growth of output:
1. Traditional farming practices
2. Intensive and shifting cultivation
 Small areas tend to be intensively cultivated. As a result,
they are subject to rapidly diminishing returns to increased
labor inputs.
3. Scarce labour supply during growing season, planting and
weeding times.
• Of all the major regions of the world, Africa has suffered
the most from its inability to expand food production at a
sufficient pace to keep up with its rapid population growth.
• As a result of declining production, African per capita food
consumption fell dramatically during the 1980s and 1990s
while dependence on imports increased. 28

29. Subsistence Agriculture and Extensive Cultivation in Africa
– Low productivity due to lack of technology
– Shifting Cultivation
– Seasonal demand for labor depending on rainy
season
– High dependence on unimproved seeds sown on
unfertilized, rain-fed fields
– Relatively high fraction of underutilized land
– High concern about climate change impact
– Need for an African new green revolution, there are
hopeful signs that it is getting underway
29

30. 4.3. The Important Role of Women
• Home-making and child rearing
• Food processing for consumption and storage
• Farming: weeding, harvesting, raising livestock
• Cash crop labor
• Generate income through cottage industry
• Are subject to gender discrimination in education
and employment
• Women provide 60% to 80% of agricultural labor
in Africa and Asia, and 40% in Latin America.
• Women work longer hours than men.
• Government assistance programs tend to reach
men, not women
30

31. 4.4. Evolution of Agricultural Production
There are 3 broad stages in the evolution of agricultural
production.
1. Primitive stage = pure subsistence peasant farm
- prevalent in Africa
- characterized by low-productivity
2. Diversified or mixed family agriculture = small produce for
consumption + a significant produce for sale
-it occurs mostly in Asia
3. Modern farm = specialized and commercial farming
- characterized by high-productivity.
- Found in developed countries and in the highly urbanized
developing countries.
31

32. Subsistence Farming
• Most output is produced for family consumption.
• A few staple foods (main foods consumed by a large portion of a
country’s population) are the chief sources of nutrition.
• Output and productivity are low.
• The simplest traditional methods and tools are used.
• Capital investment is minimal.
• Land and labor are the principal factors of production.
• The law of diminishing returns is in operation as more labor is
applied to shrinking parcels of land. No yield improved technology.
• Labor is underemployed for most of the year although workers
may be fully employed at seasonal peak periods (planting and
harvest).
• Peasants usually cultivates land using his family labor.
• Much of the cash income comes from non-farm wage labor. 32

33. Agriculture is still largely in this subsistence stage in most of
sub-Saharan Africa.
• Subsistence agriculture is a highly risky and uncertain activity.
• Traditional neoclassical model of profit maximization with
certainty is not adequate.
• Price, weather, and other uncertainty along with limited access
to credit and insurance largely explains the extent of risk-
averse behaviors of subsistence farmers.
 When risk and uncertainty are high, small farmers may be
very reluctant to shift from a traditional technology to the
modern practices and to adapt the crop pattern that yields higher
output.
• Risk-averse subsistence farmers prefer a technology of food
production that combines a low mean per hectare yield with low
variance to alternative technologies with a higher mean yield but
greater variance of risk. 33

34. Crop Yield Probability Densities of Two Different Farming Techniques
• Technique A shows a production technology with a lower mean crop
yield (10) than that of technique B (12).
• Technique A also has a lower variance around its mean yield than
technique B.
• The chances of starving are much greater with technique B, so risk
averse peasant farmers will choose technique A.
34

35. • Many programs to raise agricultural productivity among
small farmers in Africa and elsewhere have suffered because
of failure to provide adequate insurance against the risks of
crop shortfalls.
• Subsistence farmers are not more irrational than wealthy
farmers, just facing certain constraints.
Sharecropping and Interlocking Factor Markets
• Sharecropping occurs when a peasant farmer uses the
landowner’s farmland in exchange for a share of food
output which the peasant farmer grows.
• It is prevalent throughout much of Asia and parts of Latin
America.
• The poor incentive structure of sharecropping lends itself to
inefficiency.
35

36. Alfred Marshall observed that the farmer was paid only part of
his marginal product and would rationally reduce work effort
accordingly.
36

37. Here LS < LF as sharecroppers
have less incentive to
• Apply inputs including labor,
seeds, fertilizer
• Use modern farming
techniques
• Produce maximum output
37

38. Arguments on sharecropping : there are different views regarding to the
efficiency and inefficiency of sharecropping
1. It is fundamentally inefficient due to poor incentives (Marshall)
2. Monitoring approach (Cheung)
 Profit-maximizing landlords establish contracts requiring
adequate work effort from the tenant as well as specifying each
party’s share of the output.
• If the tenant fail to meet his requirement, he will be replaced by
another tenant who is willing to work harder.
• As a result, sharecropping is as efficient as any other contractual
form.
3. Sharecropping is less efficient than farming one’s own land (Ali
Shaban).
He identified farmers who farm own land and who also lease out
additional land under a sharecropping contract. He found that
farmers use fewer inputs and produce less output on the
sharecropped land than on their own land, all else being equal. 38

39. 4. Sharecropping is efficient if risks to the landlord and to the
tenant are shared ( Stiglitz, others).
• Where tenancy reform is well designed and enforced, giving
sharecroppers a larger share of the produce and security of
tenure on the land, the result will be higher income for the
tenants and greater overall efficiency.
Interlocking factor markets: factor markets whose supply
functions are interdependent, frequently because different inputs
are provided by the same supplier who exercises monopolistic or
oligopolistic control over resources.
• The rural landlord has monopoly and monopsony power.
- the landlord is the supplier of land, credit, etc.
- the landlord is the only employer of labour.
- the landlord is the only buyer of crops from peasants.
 Sharecropping is characterized by social inequality and market
failure.
39

40. The Transition to Mixed or Diversified Farming
Diversified (mixed) farming: the production of both staple
crops and cash crops and simple animal husbandry.
- represents intermediate step in the transition from
subsistence to specialized production.
- staple crop no longer dominates farm output, and new cash
crops such as fruits, vegetables, coffee, tea, and pyrethrum
are established, together with simple animal husbandry.
- can minimize the impact of staple crop failure and provide a
security of income.
From Diversified to Specialization: Modern Commercial
Farming
Specialized farming: the final and most advanced stage of the
evolution of agricultural production in which farm output is
produced wholly for the market.
40

41. - It is the most prevalent type of farming in advanced
industrial nations.
- Pure commercial profit is the criterion of success, and
maximum per-hectare yields is the basic goal of specialized
farming.
The common features of all specialized farms:
- emphasize on the cultivation of one particular crop
- use of capital-intensive and in many cases laborsaving
techniques of production
- depend on economies of scale to reduce unit costs and
maximize profits
41

42. 4.5. Core requirements of a strategy of agricultural and
rural development
• The objective of agricultural and rural development in
developing nations is progressive improvement in rural
levels of living
• The principal sources of agricultural progress:
 Improving Small-Scale Agriculture
 Rural development
Improving Small-Scale Agriculture
i. Technology and Innovation
- New agricultural technologies and innovations are
preconditions for sustained improvements in levels of
output and productivity.
- Two major sources of technological innovation can increase
farm yields:
42

43. a. Introduction of mechanized agriculture to replace human
labour
- Labor saving machinery increases the volume of output per
worker.
- However, it creates more rural unemployment.
b. Biological (hybrid seeds and biotechnology), water control
(irrigation), and chemical (fertilizer, pesticides, insecticides,
etc.) innovations
- they are land-augmenting; they improve the quality of
existing land by raising yields per hectare .
- indirectly they increase output per worker.
- they are scale-neutral; they can be applied equally and
effectively on large and small farms.
- they do not necessarily require large capital inputs or
mechanized equipment.
43

44. To sum up:
Technological change and innovation:
• Modern mechanical and chemical inputs
• High-yield seed varieties
• Modern farming techniques
• Appropriate technology: labor-intensive
44

45. ii. Institutional and pricing policies: providing the
necessary economic incentives
- New hybrid seeds require access to complementary inputs
such as irrigation, fertilizer, insecticides, credit, and
agricultural extension services.
- Large landowners , with access to these complementary
inputs and support services, are able to gain a competitive
advantage over smallholders and eventually drive them out
of the market.
- Large-scale farmers obtain access to low-interest
government credit, while smallholders are forced to turn to
moneylenders.
• A developmental innovation turns out to be antidevelopment
if government policies and social institutions act against the
active participation of the small farmer. 45

46. • Many governments in developing nations maintained low
agricultural prices in an attempt to provide cheap food for
the urban modern sector.
 Farmers were paid prices below world competitive and
free-market internal prices.
 With farm prices so low , there was no incentive for farmers
to expand output or invest in new productivity raising
technology.
• If governments aim to promote increase in agricultural
production that make a larger impact on poverty reduction
through green revolution technologies, they must
- make the appropriate institutional and credit market
adjustments to small farmers
- provide incentives for small and medium size farmers by
implementing pricing policies that truly reflect internal
market conditions. 46

47. iii. Adapting to New Opportunities and New Constraints
• The green revolution varieties of seeds , sales to growing
urban areas, fair trade, etc. provide good opportunities.
 Small farmers will need special organization and assistance
to take advantage of new opportunities.
• Environmental problems driven by global warming and
climate change are the biggest constraint, which are
expected to most negatively affect sub-Saharan Africa and
South Asia.
 Smaller and poorer farmers are affected severely because of
lesser capacity to adapt.
Conditions for Rural Development
1. Land Reform: means the redistribution of land rights for
the benefit of the landless, tenants, and farm laborers. 47

48. • Its intention is to develop a more equal distribution of
agricultural incomes and facilitating rural development.
• It results in higher agricultural output and the simultaneous
achievement of greater efficiency and more equity.
 Almost equal structure of land ownership brings equitable
distribution of rural income and wealth.
 It involves a redistribution of the rights of ownership or use
of land away from large landowners to cultivators with very
limited or no landholdings.
2. Supportive Policies
- rural institutions that control production (banks,
moneylenders, seed and fertilizer distributors)
48

49. - Supporting government aid services (e.g., technical and
educational extension services, public credit agencies, storage
and marketing facilities, rural transport and feeder roads)
- government pricing policies with regard to both inputs (e.g.,
removing factor price distortions) and outputs.
3. Integrated Development Objectives
• restoring a proper balance between urban and rural
economic opportunities.
• creating the conditions for broad popular participation in
national development efforts and rewards.
49