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Beyond Agriculture: A Greater Role
  for Urban Industrial Growth?
             Stefan Dercon
          University of Oxfor...
Background
“In Search of a Strategy: Rethinking Agriculture-led
  Growth in Ethiopia”
• Started from a key question:
“how ...
Method
• Theory revisited
• Meta-analysis on evidence
  – Relevant comparative evidence from other
    settings
  – Critic...
We know what is at stake:
      Iron Law of Economic Development

               Ethiopia
Percent of
Pop’n in Ag.
Sector

...
Take China…

Percent of
Pop’n in Ag.   China in 1980s
Sector




                       Income per Capita
Transformation Path

                            China in 20 years:

Percent of                  from 80% to 55% in agricu...
Looking for growth…
• Our interest: growth, i.e. not just 20% more
  GDP, but a process in which gains multiply
  themselv...
Agriculture first
• Rational case
     • Story about high returns and linkages and multipliers
       from initial agricul...
Key lessons
• Growth in the urban economy is now
  ESSENTIAL in Ethiopia to achieve faster
  growth in agriculture and fas...
Structure
1. Revisit the comparative evidence
2. Agriculture first in Ethiopia: prices and
   linkages
3. Agricultural con...
Recent evidence
• Massive growth in output
  +100% since 1996/97, +12% per year in last 5 years
  +200% wheat, +150% maize...
The area expansion?
• Area cultivated (cereals) per dweller constant
  since 1980!
• PASDEP forecasted 1% area growth in l...
Table 3: Modern Input Use 1997/98-2007/08 on Cereals
Source: Calculations from Seyoum Taffesse (2008) using CSA data (CSA ...
Table 4: Percentage Yield Gap of Ethiopia compared to selected countries in selected years
Source: FAOSTAT data up to 2007...
The fastest green revolution in history?


• Or something is going wrong with the data?
• In 5 years, wheat yield growth o...
Structure
1. Revisit the comparative evidence
2. Agriculture first in Ethiopia: prices and
   linkages
3. Agricultural con...
1. Revisit the comparative evidence

• Perceived wisdom:
  – Growth in predominantly agricultural economy
    has to start...
Revisiting the evidence...
• England, France (history): key stimulus for agricultural
  productivity growth in 17th -19th ...
Conclusion?
• Not quite simply ‘agriculture first’
• Technology adoption/changing practices occur
  not in a vacuum, but r...
Structure
1. Revisit the comparative evidence
2. Agriculture first in Ethiopia: prices and
   linkages
3. Agricultural con...
2. Questioning agriculture first
• Technology availability?
  – Some, but not with massive returns
     • E.g. Maize: 56% ...
2. Questioning agriculture first...
• Prices: economy-wide interactions
  – Ethiopia, land-locked with high transactions c...
Figure 1: Import and export parity, and wholesale prices for wheat (Addis Ababa), January 1998 to November 2008
2. Questioning agriculture first...
• Incentives for cereal agricultural growth would
  require urban income growth to sus...
Conclusion 2
• In Ethiopia:
  – No ‘golden eggs’ in technology
  – Requiring high incentives for productivity growth
  – I...
Conclusion 2
• Agriculture not first is not the same as
  agriculture last:
  – Agricultural growth will remain essential ...
Structure
1. Revisit the comparative evidence
2. Agriculture first in Ethiopia: prices and
   linkages
3. Agricultural con...
3.1 Inputs...
• If high productivity gains exist, it is for
  ‘packages’ of fertilizer, seeds, practices...
• But meanwhil...
Fertilizer...
• In isolation from seeds, economic returns very
  doubtful ‘on average’ (so scope of expansion
  beyond 40%...
Seeds...
Even for maize only 20% improved seed use, wheat
  lower
– Failure of science and adaptation: not just need
  for...
Extension/advisory activities
• Does it work in terms of boosting yields?
• We don’t know...
3.2 Scale of production
• Are farms too small to be efficient? Would
  there be gains from plot consolidation?
  – No evid...
3.3 Input markets
• Seeds, fertilizer, credit, transport have in
  common ‘tinkering’, with regulatory and
  access advant...
3.4 Input Credit
• Input credit system (with regional state
  budget at collateral) dismantled
• Input credit remains high...
Conclusions
• Danger of considering agricultural growth in
  isolation
• Growth in agriculture constrained by
  – lack of ...
3 final questions
• What about non-food/export crops?
  – tradable, exportable
  – Its growth can perform same role as ‘ur...
Beyond Agriculture: A Greater Role for Urban Industrial Growth?
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Beyond Agriculture: A Greater Role for Urban Industrial Growth?

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Beyond Agriculture: A Greater Role for Urban Industrial Growth?

  1. 1. Beyond Agriculture: A Greater Role for Urban Industrial Growth? Stefan Dercon University of Oxford and International Growth Centre
  2. 2. Background “In Search of a Strategy: Rethinking Agriculture-led Growth in Ethiopia” • Started from a key question: “how to achieve faster growth through commercialization of agriculture, with emphasis on cereals” • Turned into two questions: – How to get growth in agriculture? – The role of agriculture in overall growth in the economy? • Focus on grains, less on non-food crops and livestock. • Attempt at consolidation
  3. 3. Method • Theory revisited • Meta-analysis on evidence – Relevant comparative evidence from other settings – Critical review of evidence on Ethiopia • Changed my mind on many points during course of this work.
  4. 4. We know what is at stake: Iron Law of Economic Development Ethiopia Percent of Pop’n in Ag. Sector US and other OECD nations Income per Capita Data from the World Bank
  5. 5. Take China… Percent of Pop’n in Ag. China in 1980s Sector Income per Capita
  6. 6. Transformation Path China in 20 years: Percent of from 80% to 55% in agriculture Pop’n in Ag. Sector Income per Capita
  7. 7. Looking for growth… • Our interest: growth, i.e. not just 20% more GDP, but a process in which gains multiply themselves.... • In a rare economy: one that has stuck to a reasoned strategy, ADLI, for 15 years, including some new incarnations (PASDEP); a version of ‘agriculture first’ • I will take a critical look at this (with some credentials)
  8. 8. Agriculture first • Rational case • Story about high returns and linkages and multipliers from initial agricultural productivity increases • Resulting in high growth and poverty reduction, • Based on current and historical evidence • Emotive case • Political economy case
  9. 9. Key lessons • Growth in the urban economy is now ESSENTIAL in Ethiopia to achieve faster growth in agriculture and faster poverty reduction. The conditions in Ethiopia are not right for an agriculture first strategy. • Current growth strategy in agriculture has positive parts but necessary elements are just plain missing.
  10. 10. Structure 1. Revisit the comparative evidence 2. Agriculture first in Ethiopia: prices and linkages 3. Agricultural constraints on the agricultural transformation
  11. 11. Recent evidence • Massive growth in output +100% since 1996/97, +12% per year in last 5 years +200% wheat, +150% maize, 60% teff, 80% sorghm • Huge area expansion +44% since 1996/97, +5% per year in last 5 years +85% wheat, +70% maize, 20%teff, 60% sorghum • Strong yield increase +40% since 1996/97; +6% per year in last 5 years +60% wheat,50% maize, +30% teff, 13% sorghum
  12. 12. The area expansion? • Area cultivated (cereals) per dweller constant since 1980! • PASDEP forecasted 1% area growth in last 5 years, almost a third more • Where does this land come from?
  13. 13. Table 3: Modern Input Use 1997/98-2007/08 on Cereals Source: Calculations from Seyoum Taffesse (2008) using CSA data (CSA (September 1998), CSA (July 2003b), and CSA (August 2008 )) for all cereals. The yield expansion • Not easily explained by inputs 2007/08 2001/02 1997/98 Fertiliser Applied area (share in total area cultivated - %) 39.0 42.8 32.3 Fertiliser application (total quintals/ total hectares) 0.45 0.30 0.37 Fertiliser application (quintals per hectare of fertiliser 1.16 1.00 1.15 applied area) Improved seed applied crop area (% of crop area) 4.7 3.5 2.4 Pesticide applied crop area (% of crop area) 20.8 10.8 12.0 Irrigated crop area (% of crop area) 1.1 1.3 0.6 Extension package covered crop area (% of crop area) 14.5
  14. 14. Table 4: Percentage Yield Gap of Ethiopia compared to selected countries in selected years Source: FAOSTAT data up to 2007. Data for 2008 are from FAO (2009) for Ethiopia compared to 2005-07 for other countries. LDC and Landlocked LDC are less developed countries and the least developed countries that are landlocked (all based on FAO definitions). The international comparison Maize Wheat Cereals (FAO definition) 93/03 05/07 08 93/03 05/07 08 93/03 05/07 08 Kenya 0% 30% 34% -32% -15% -2% -25% -10% 10% Malawi 20% 59% 64% 89% 28% 47% -1% 29% 34% Tanzania 46% 108% 115 -3% 47% 68% 15% 58% 63% Uganda 1% 54% 59% -27% 6% 21% -15% 20% 24% India -8% 16% 20% -50% -30% -20% -48% -37% -23% China -67% -57% -55% -65% -59% -53% -65% -59% -53% Vietnam -37% -37% -35% -67% -61% -60% USA -80% -75% -74% -51% -32% -21% -76% -72% -71% LDC 35% 66% 71% -9% 3% 18% -11% 5% 8%
  15. 15. The fastest green revolution in history? • Or something is going wrong with the data? • In 5 years, wheat yield growth of 50%+, faster than ever recorded in China or India (but still below 120% target in PASDEP) • An appeal to transparent auditing procedure!
  16. 16. Structure 1. Revisit the comparative evidence 2. Agriculture first in Ethiopia: prices and linkages 3. Agricultural constraints on the agricultural transformation
  17. 17. 1. Revisit the comparative evidence • Perceived wisdom: – Growth in predominantly agricultural economy has to start in agriculture • English Story • East-Asian miracle • WDR 2007
  18. 18. Revisiting the evidence... • England, France (history): key stimulus for agricultural productivity growth in 17th -19th century came from high urban demand; • Vietnam, China, India: agriculture played a role but not key/sole driver of growth. In all cases strong incentives were present to increase productivity: – Vietnam: underused HYV given excellent agro-climatic (and irrigation) potential; – China: very strong price incentives in early 1980s; – Green revolution India and other countries: HYV rice (IR8) offering 5 times yield using standard practices and 10 times yield with irrigation/fertiliser mix; for wheat also multiple of yield on offer. Even then, it took many years to realize doubling of yields in rice and other crops. – Against this: Philippines – new technologies in 1960s but no rise in incomes, as rice price declined and no agricultural transformation
  19. 19. Conclusion? • Not quite simply ‘agriculture first’ • Technology adoption/changing practices occur not in a vacuum, but require high economic returns – Either massively high productivity technologies/ practices – Or sustained high prices, requiring high demand
  20. 20. Structure 1. Revisit the comparative evidence 2. Agriculture first in Ethiopia: prices and linkages 3. Agricultural constraints on the agricultural transformation
  21. 21. 2. Questioning agriculture first • Technology availability? – Some, but not with massive returns • E.g. Maize: 56% for improved seeds/practices/fertilizer relative to traditional practices/seeds (2001) – Would require sustained high prices to offer high returns
  22. 22. 2. Questioning agriculture first... • Prices: economy-wide interactions – Ethiopia, land-locked with high transactions costs to borders – Implication: for wide range of prices, as if closed economy (non-tradable for wide range) – So tricky food price balance: • not too high to stifle growth in rest of economy, • not too low to stifle innovation and growth in agriculture • Only limited stabilisation offered by international markets, with output increases rapidly undermining incentives (e.g. maize in 2001/02)
  23. 23. Figure 1: Import and export parity, and wholesale prices for wheat (Addis Ababa), January 1998 to November 2008
  24. 24. 2. Questioning agriculture first... • Incentives for cereal agricultural growth would require urban income growth to sustain demand for cereals. • Can this urban income growth simply stem for higher rural incomes or higher rural production? No... = (forward) production linkages (but ?) = low consumption linkages (marginal budget share for cereals 19%, other food 22%, ind goods 22%)
  25. 25. Conclusion 2 • In Ethiopia: – No ‘golden eggs’ in technology – Requiring high incentives for productivity growth – In turn requiring processes of urban growth – Which agricultural growth cannot deliver • Corroborates with other evidence: – For African standards, very small gap between rural and urban poverty, with latter creeping closer over time.
  26. 26. Conclusion 2 • Agriculture not first is not the same as agriculture last: – Agricultural growth will remain essential part • ‘Commercialisation’ essential but – Is not just supply plus markets (traders etc) – Requires demand growth to increase and sustain demand – Requires agricultural strategy that pays more attention to economic returns (not just yields) and the complementarity of urban economic growth.
  27. 27. Structure 1. Revisit the comparative evidence 2. Agriculture first in Ethiopia: prices and linkages 3. Agricultural constraints on the agricultural transformation
  28. 28. 3.1 Inputs... • If high productivity gains exist, it is for ‘packages’ of fertilizer, seeds, practices... • But meanwhile – about 40% cereal area using fertilizer but only 5% improved seeds – Fertilizer dominating agenda – Extension efforts not properly assessed
  29. 29. Fertilizer... • In isolation from seeds, economic returns very doubtful ‘on average’ (so scope of expansion beyond 40% unlikely) – Yield difference minimal, VC ratios for most crops not high enough – Relatively high cost would suggest even in ‘packages’ not massive returns • Meanwhile strongly promoted despite lack of seeds
  30. 30. Seeds... Even for maize only 20% improved seed use, wheat lower – Failure of science and adaptation: not just need for more support, but also need innovative institutional designs – Failure of multiplication and distribution system: design failures
  31. 31. Extension/advisory activities • Does it work in terms of boosting yields? • We don’t know...
  32. 32. 3.2 Scale of production • Are farms too small to be efficient? Would there be gains from plot consolidation? – No evidence (!) • Does it mean large scale commercial farming no role? – Not necessarily – and scope for integrating currently ‘separate’ developments (e.g. contract farming, scale economies in marketing)
  33. 33. 3.3 Input markets • Seeds, fertilizer, credit, transport have in common ‘tinkering’, with regulatory and access advantages for incumbents (private or parastatals) • Argument pro: ‘they do their job reasonably well’ • Argument against is dynamic: ‘no competitive forces to encourage efficiency improvements or new entry’ • Key trick: develop contestability of these markets
  34. 34. 3.4 Input Credit • Input credit system (with regional state budget at collateral) dismantled • Input credit remains highly risky for both farmer and financial institution, risking default • Need for sustainable design of input credit system, including with systems of insurance
  35. 35. Conclusions • Danger of considering agricultural growth in isolation • Growth in agriculture constrained by – lack of urban income growth and – by failures in science and seed markets, – limited returns to fertilizer, – and likely dynamic constraints from input market structures.
  36. 36. 3 final questions • What about non-food/export crops? – tradable, exportable – Its growth can perform same role as ‘urban income growth’, unless land competition with food when it would affect urban growth • Why not off-farm income? • Where will urban income growth come from?

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