Rao 3b the role of agriculture in growth & poverty alleviation
FOOD SECURITY Concepts, Basic Facts,and Measurement Issues June 26 to July 7, 2006 Dhaka, Bangladesh
Rao 3b: The Role of Agriculture inGrowth & Poverty AlleviationLearning: The goal is to achieve an understandingof the sometimes paradoxical role of agriculturein promoting development and foodsecurity, the value of agricultural growth ineconomy-wide growth and povertyreduction, international variations and thechanging role of agriculture.
Brief Contents• paradox of the role of agriculture in econ. growth• empirical evidence of agriculture/non-agriculture growth complementarity• the growth costs of neglecting agriculture• the value of agricultural growth in reducing poverty and raising FS• Cross-country variations and country typology• transforming traditional agriculture and rural or urban policy biases• the changing role of agriculture
The Role of Agriculture• Paradox: Agriculture declines markedly with economic growth (Reason: Engels Law + Diminishing Returns)• Yet, neglect of AG is a persistent cause of growth failure, widespread poverty and food insecurity. Two apparently conflicting aspects to this role: – High initial share in both GDP and (especially) employment. This implies that neglecting AG would hurt both growth and poverty reduction. – Declining dynamic share: Yet, in long- run, diversification into industry and modern services is route to higher economic growth.
The Role of Agriculture• Is there a conflict, then, between agricultural growth and economic growth? Or at least between economic growth and poverty alleviation?
Agriculture/Non-Agriculture Complementarity• empirical evidence: high + correlation between AG g-rate and GDP g-rate till y<$2000-3000• supply-side complementarity: AG Food, Labor & Saving surpluses absorbed by non-AG• demand-side complementarity: AG source of effective demand for non-AG and so stimulates growth
Agriculture/Non-Agriculture Complementarity• THUS, at low y, AG growth speeds up overall growth by contributing to investment demand and saving supply, and relieving food and/or import supply constraints
Paradox Resolved• At the early stages of development, faster AG growth not only does not conflict with economic growth but is basically complementary to it. [So AG neglect can be costly]• But except for short periods, AG tends to grow more slowly than the rest of the economy implying a structural transformation.• AG growth promotion should therefore go hand-in-hand with overall growth promotion
Why Might AG be Good for Poverty Reduction?1. majority of poor are in rural areas where AG leads employment and livelihoods2. AG sector is labour intensive and can generate employment for landless and under-employed (mostly poor)3. AG incomes is major basis of both demand and investible resources for growth of off-farm rural employment in informal industry and services
Why Might AG be Good for Poverty Reduction?4. rural & AG growth stimulates urban non-AG growth via increased purchasing power among rural people5. rural & AG growth holds down migration and so reduces urban poverty (disproportionate among migrants)
Agriculture, Rural Development, and Food Security• Agriculture as an Engine for Poverty Reduction: – Fact 1: No country with rural population >75% had pc food supply >2,500Kc. – Fact 2: All countries with >3,000Kc had <60% of population in rural areas – Fact 3: Yet food production is often path out of poverty for many, or even only path – These facts are yet another manifestation of "the paradox"
Limits to Complementarity of AG & GDP Growth, of AG & Poverty Reduction• Natural resource and environmental limits – More severe resource and environmental limitations of late developers – Limited land and growing populations reduce the land-per- worker steadily.• Investment costs: Though available, HYV/GR technologies are not cheap options. Require investments in rural education, agricultural research, extension, irrigation, roads, energy, etc. From a growth standpoint, agriculture is no longer a `bargain sector’.• Achieving competitiveness: Late-industrialisation is competitive, hard and K-intensive. This makes AG neglect likely and growth poverty-enhancing.
Variations Across Developing Countries in Role of AG• Income level: large variation in y-levels so structural constraints (savings, foreign exchange, external vulnerability) vary in severity• Agrarian structure: inequality in access to productive assets varies; greater inequality distorts rural markets and mal-distributes gains from growth• Technological potentials: wide variation in natural resources or environmental pressures; AG technology does not favour all regions equally
Country Scenarios• Technically, the above categories together yield 8 scenarios. It would not be very useful to examine each policy under all these possible scenarios. Instead, we shall use judgement in indicating how certain scenarios are likely to differ from others in the context of our policy- analytic discussions later in the volume. In any case, certain scenarios seem rather more probable than others.
Country Scenarios• These scenarios are… Type INCOME Level AG Structure TECH Potential 1 low-income Unimodal low-potential 2 low-income Unimodal high-potential 3 middle-income Unimodal high-potential 4 low-income Bimodal high-potential 5 middle-income Bimodal high-potential
Twin Theses:Transforming Traditional Agriculture• T-1: Poor Peasants But Efficient Markets or "poor but efficient“ – Poor because technology is backward. Efficient because peasants rational, and markets efficient.• T-2 Discriminatory And Inefficient States – All systemic inefficiencies due solely to government interference in markets: extracting resources from agriculture; depressing agricultural prices or "urban bias"; public sector activities burdened the economy.
Criticisms of T-1• Ignores profound weight of land/inequality for mass poverty and food insecurity• Agrarian inequality is also major cause of AG stagnation• Agrarian inequality also makes FACTOR markets inefficient e.g., inverse-size-yield relation; localized monopolies• Inequality also is the major cause of distorted government policies
Criticisms of T-2• Ignores fact that state is critical for GR/HYV technologies• Getting AG prices "right" (1): ignores TOT consequences• Getting AG prices "right" (2): ignores fiscal and other functions of AG prices• Ignores class bias of policies
Agriculture-Economy Interactions: Bias in Pricing• T-2 is based on unfavourable tariffs and exchange rate overvaluation• Neoclassical: Peasants VS City-Dwellers + State• Classical: Rural Rentiers VS Urban Capitalists• So Q is: whom does high AG prices benefit? whom do they hurt?• Windfall gain to rentiers + [Employment Rise(?) + Food Price Rise]• World prices as NORM: role of DC policies
Agriculture-Economy Interactions: Bias in Pricing (examples)• e.g., Bangladesh (ARKhan): Poverty rose 1985- 86 despite significant rise in y. – But AG stagnant: due to drastic fall in public AG development expenditure. – Price reform reduced AG input subsidies – No counteracting growth-inducing public policy• e.g., India & Indonesia: rural & urban poverty rises with rising food prices
Changing Roles of Agriculture in Economic Development• Adjustment: a set of policy reforms designed to activate (if stagnant) or accelerate economic growth, usually in a "market-friendly" direction• Two components: – macroeconomic adjustment (stabilisation): to reduce fiscal and external disequilibria. The policy changes involve short- term remedies for current problems and primarily influence the demand side of the economy. – structural adjustment: to influence supply side of economy both to raise growth and to avoid future fiscal and external disequilibria
Two Engines of Growth?• Most economists believe free trade is unfailing "engine of growth“• We have argued, at low y, AG is a reliable "engine of poverty reduction & growth“ – Q: Can the two "engines" work together in harmony? Or is there conflict?
Case Study: SSA & L-America (Poulton, Kydd and Harvey,1999)• Most absorbed the lessons of conventional wisdom (Twin Theses)• Large concentrations of poverty• Poverty reduction did not automatically flow from higher growth• Liberalization did not automatically produce competitive markets• Failure to recognize heavy dependence of the fisc on trade taxes• Low level of development of technologies for sustainable intensification• Crucial role of a range of public expenditures/subsidies to get agriculture moving• Low price elasticity ←→ Major supply shifters are transport, credit, marketing infrastructure in Africa
Do Developing Countries Have AG Comparative Advantage?• From World Bank to Bob Geldof, From WTO to Bono: for price reforms• Will the poor really benefit? – SSA: Sachs says Africa does not have international comp adv inAG. – This implies Africa has comp adv in IND which seems implausible. – In reality, tradability of much of backward agriculture is questionable. – More complete AG liberalization could depress, not stimulate, AG – This calls the consensus of Bank-Bono-Bob-and-WTO into question.
Promoting Rural-Urban, Agriculture-Industry Linkages• The logic of a complementary strategy: – SUPPLY-&-DEMAND AG output growth can both relax food supply constraint on non-AG growth and raise AG incomes which will raise non-AG demand & so growth – GROWTH-&-EQUITY But rural inequalities impede AG growth. First, at the institutional and markets level. Second, also by restricting demand for food.• IF growth takes place with equity, THEN, S-&-D can equilibrate at high levels• IF growth is unequalizing, food demand will not rise much, so S-&-D will equilibrate at low levels