Research & Development

Abstract

After 20 years of neglect by international donors, agriculture is now again in the headlines because high food prices are increasing food insecurity and poverty. In the coming years, it will be essential to increase food productivity and production in developing countries, especially in Sub- Saharan Africa and with smallholders. This, however, requires finding viable solutions to a number of complex technical, institutional, and policy issues, including land markets, research on seeds and inputs, agricultural extension, credit, rural infrastructure, connection to markets, rural non-farm employment, trade policy and food price stabilization. This paper reviews what the economic literature has to say on these topics. It discusses in turn the role played by agriculture in the development process and the interactions between agriculture and other economic sectors, the determinants of the Green Revolution and the foundations of agricultural growth, issues of income diversification by farmers, approaches to rural development, and issues of international trade policy and food security, which have been at the root of the crisis in agricultural commodity volatility in recent years.

The agricultural sector continues to play a crucial role for development, especially in low-income countries where the sector is large both in terms of aggregate income and total labor force. Having been a key preoccupation of developing country governments, donors and the international community during the 1960s and 1970s, agriculture disappeared from the development agenda in the 1980s and 1990s, only to reappear in the first decade of the 21st century because of neglect and underinvestment (see Fig. 1). There is renewed interest in the problems of the sector—not to a small extent thanks to the World Development Report 2008, Agriculture for Development (World Bank, 2007) and Agriculture at a Crossroads (IAASTD, 2009), both of which came from global consultative processes of scientists, decision makers and donor agencies. Donor countries have pledged large sums for investment in agriculture—for example, the G8 countries promised $22 billion during their meeting in Aquila, Italy in 2009. These pledges were made in the aftermath of three simultaneous global crises—food crisis, climate

crisis, and financial crisis— and their aftermath. Food prices have spiked twice in a period of 4 years: the United Nations Food and Agriculture Organization (FAO) food price index peaked in June 2008, then hit another record high in March 2011. Drought, fires, and monsoon floods have destroyed harvests in many countries from Russia to Pakistan. In poor countries, this has led to hunger, worsening food insecurity, and vulnerability to poverty. …

There are two challenges related to agriculture. The first is the need to increase food productivity and production in developing countries, especially in Sub-Saharan Africa and with smallholder farmers. To achieve this, a number of problems need to be addressed: property rights, R&D for seeds and inputs, irrigation, fertilizer, agricultural extension, credit, rural infrastructure, storage, and connection to markets. The second problem is the volatility of food prices, often because of events outside the control of poor countries. An interconnected combination of steps could help ensure that the most vulnerable countries and people get the nutrition they need.1 The modest ambition of this paper is to review the economic literature on agriculture, focusing on the issues that are critical for agricultural productivity and poverty reduction.

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Developing economies have generally been described as dual economies with a traditional agricultural sector and a modern capitalist sector.4 Productivity is assumed to be lower in agriculture than in the modern sector. The canonical model was put forward by Lewis (1954) and subsequently extended by Ranis and Fei (1961). Lewis’ model rests on the idea of surplus labor in the agricultural sector. With lower productivity in agriculture, wages will be higher in the modern sector, which induces labor to move from agriculture to the modern sector, which in turn generates economic growth. Other precursors, such as Schultz (1964), also point out the importance of food supply by the agricultural sector. In Schultz’s view, agriculture is important for economic growth in the sense that it guarantees subsistence for society, without which growth is not possible. This early view on the role of agriculture in economics matched Kuznets’ (1966) empirical observation that the importance of the agricultural sector declines with economic development. In this view, the role of agriculture in economic development is to supply cheap food and low wage labor to the modern sector. Otherwise, both sectors have few interconnections. ... Growth and higher productivity in the agricultural sector can contribute to overall economic growth by releasing labor as well as capital to other sectors in the economy. However, industrialization is seen as the ultimate driving force behind a country’s development and agriculture as a traditional low-productivity sector. Building on the Lewis model, Johnston and Mellor (1961) account explicitly for agriculture as an active sector in the economy. In addition to providing labor and food supply, agriculture plays an active role in economic growth through production and consumption linkages. For instance, agriculture can provide raw materials to nonagricultural production or demand inputs from the modern sector.

On the consumption side, higher productivity in agriculture can increase the income of the rural population, thereby creating demand for domestically produced industrial output. Such linkage effects can increase employment opportunities in the rural non-farm sector, thereby indirectly generating rural income. Moreover, agricultural goods can be exported to earn foreign exchange in order to import capital goods. The importance of such linkages was further stressed by Singer (1979) and explicitly embodied in Adelman’s general equilibrium idea of ‘‘agricultural demand-led industrialization’’ (ADLI), according to which, because of production and consumption linkages, a country’s development strategy should be agriculture-driven rather than export-driven and increased agricultural productivity would be the initiator of industrialization. Moreover, emphasis should be placed on small-to-medium-size farmers because they are more likely to use domestically produced intermediate goods, as opposed to largescale producers who might import machinery and other inputs, which would weaken the linkages between agriculture and other sectors (Adelman, 1984). The

fact that there are important linkages between the traditional and modern sectors in developing countries makes agricultural growth an important instrument for decreasing poverty. The contribution to poverty reduction takes place directly, through the effects of agricultural growth on farm employment and profitability, and indirectly because increases in agricultural output induce job creation in upstream and downstream non- farm sectors as a response to higher domestic demand. Potentially lower food prices increase the purchasing power of poor consumers. The magnitude of these effects for poverty reduction depends on the specific circumstances of an economy. For example, if technological progress in the agricultural sector is labor-saving, farm employment might not necessarily increase (Irz et al., 2001).

Although most of the literature views agriculture as an active and dynamic economic sector, some authors reach quite different conclusions. Gollin (2010) notes that the large share of agriculture in many developing economies does not immediately imply that overall growth has to be based on an ADLI-type strategy. Matsuyama (1992) suggests that the relation between agricultural growth and overall economic growth depends on the openness of a country to international trade. Whereas agricultural growth goes hand in hand with economic growth in small, closed economies—where gains in agricultural productivity will lead to the linkage effect described above—the relation might be reversed in the case of an open economy. If the country has a comparative advantage in agriculture, openness to trade will draw resources away from the modern sector into agriculture, which might be less productive than industry. The importance of the degree of openness of a country was pointed out early on by proponents of ‘‘agriculture-first’’ approaches to development. For instance, Ranis and Fei (1961) acknowledge that imports could potentially substitute for domestic agricultural products. Adelman (1984) suggests that ADLI would work best for low-income countries that are not yet export driven; and Foster and Rosenzweig (2003) stress that the tradability of rural non- farm sector goods can have different implications. In a general equilibrium perspective, productivity gains in the agricultural sector have a negative impact on the tradable non-farm sector. This is because agricultural products as well as rural non-farm non-tradable have a relatively inelastic demand for labor, whereas tradable goods have more elastic labor demand. If wages increase due to greater agricultural productivity, factories producing tradable goods, which are assumed to be operated by external producers, will move to escape the higher wages. There is a vast literature, ranging from critical contributions that do not support ‘‘agriculture first’’ approaches to more recent ‘‘agro-pessimism’’ views. The latter are based on the observation that agriculture in developing countries might be the least productive sector in the economy. Dercon (2009) derives this conclusion from a two-sector model elaborated by Eswaran and Kotwal (1993). He explains that, in an open economy, in which both agricultural and modern-sector goods can be traded, linkages between the two sectors become less important for overall growth. As a result, there is less necessity to increase agricultural productivity to induce overall growth.

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Probably the agricultural sector’s most important contribution to development in poor countries in the past has been to provide savings, i.e., surplus—extracted through various means—over and above what was required for the reproduction of agricultural producers, which allowed industrialization to take place. The literature has extensively discussed the tax and price policies that are necessary to bring about surplus extraction (see Sah and Stiglitz, 1984; Carter, 1986). These policies became famous by the discussions between Preobazhensky and Bukharin about the so-called ‘‘primitive’’ forms of socialist accumulation in the Soviet Union where farmers faced artificially low prices for their output and punitive taxation throughout the 1920s and 1930s (Conquest, 1987). Consistent with these early models of agriculture as generating a surplus that could be extracted for the benefit of industry, in the recent past, governments in developing countries have imposed a heavy burden on agriculture by implementing urban-biased policies. Krueger et al. (1991) multi-country study provides empirical support for the view that price policy, trade policy, and exchange rate policy in virtually all developing countries have discriminated against agriculture. ... The discrimination has been direct, through food subsidies or taxes on agricultural exports, or indirect, through manufacturing protection and exchange rate overvaluation. During 1960–1984, these policies extracted an average of 46 percent of agricultural GDP from the sector in 18 developing countries (Krueger et al., 1991). This massive study confirmed the hypothesis of Schultz (1964), who argued that peasants in poor countries are not backward and ‘‘traditional’’, but, on the contrary, rational decision makers who maximize the returns from their resources. Their apparent unwillingness to innovate, he argued, was rational because governments of developing countries often set artificially low prices on their crops and taxed them heavily. In other words, peasants respond to incentives. Anderson (2009) updated the Krueger Schiff, and Valde` s study, reaching similar conclusions but showing that, since the mid-1980s, the inter-sector bias against agriculture and the anti-trade bias have been substantially reduced. Many developing countries have undertaken a great deal of policy reform and opened to trade and benefited

proportionately more (relative to GDP) than high-income economies from those trade- related policy reforms. Developing countries would gain nearly twice as much as richer economies by completing the reform process—with 72 percent of the prospective gains to developing countries coming from agricultural and food policy reform. In developing countries, net farm income (agricultural value added) is estimated to have been 5 percent higher in 2004 than it would have been without the reforms since the mid-1980s. If policies remaining in 2004 were removed, net farm income would rise by another 6 percent (far more than the proportional gain to J.-J. Dethier, A. Effenberger / Economic Systems xxx (2012) xxx–xxx 7 G Models ECOSYS- 380; No. of Pages 31 Please cite this article in press as: Dethier, J.-J., Effenberger, A., Agriculture and development: A brief review of the literature. Econ.Syst. (2012), doi:10.1016/j.ecosys.2011.09.003 nonagricultural households). These reforms could further alleviate global inequality and poverty, since three-quarters of the world’s extreme poor are in farm households in developing countries. One way to look at policy changes over the past 25 years would be to say that developing countries follow the example of higher-income countries in moving from anti to pro-farmer policies as they develop. The Anderson study shows that import-competing farmers in developing countries are being increasingly protected over time Agricultural production has been directly supported by subsidies to farm inputs such as fertilizers and irrigation in many developing countries, such as India. These policies generally benefit large farmers more than smallholders , that public policies that actively support agriculture, such as pricing or support to agricultural research and extension, are a necessary prerequisite for agricultural growth, and that agricultural market liberalization has not benefited small farmers due to market failures and distortions. Asia’s Green Revolution was supported by government interventions sustained for long periods, such as fertilizer subsidies that reduced prices to 25 percent of their world market price. For example, the 5 percent annual growth in Indonesia’s rice production over 1970–1988 was mainly

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The Green Revolution, meaning the adoption of high-yielding varieties, was largely made possible by investments in fertilizer and irrigation. The massive use of fertilizers—without the help of which high-yielding varieties cannot grow successfully—changed agricultural practices forever. Irrigation. The liberalization of the market for agricultural outputs does not impose a bias on either sector but it can affect the competitiveness of smallholders. Agriculture and development: A brief review of the literature. Econ. Syst. (2012), doi:10.1016/j.ecosys.2011.09.003 thanks to which water can be stored and sent to dry areas, putting more land into agricultural production—also increased production. The Green Revolution exponentially increased the amount of food production worldwide and sharply reduced the incidence of famine, especially in Asia and Africa. ...

There have been major downsides, however. First, since only a few species of high-yield varieties of rice or wheat were grown, tens (if not hundreds) of thousands of seed varieties that existed prior to the Green Revolution are no longer being used. Increased crop homogeneity implies that seeds are more prone to disease and pests because there are not enough varieties to fight them. In order to protect these few varieties, pesticide use grew, with major negative environmental externalities. Second, at least if one adopts a Malthusian view of development, the increased amount of food production available worldwide has been an important cause of overpopulation. Between 1980 and 2004, the agricultural sector grew at an average rate of 2.6 percent worldwide, with two-thirds of this growth contributed by Asian economies. Agricultural yields in Asia increased at an average rate of 2.8 percent between 1961 and 2004. In Sub-Saharan Africa, the average rate of agricultural growth was 3 percent over the same period but growth per capita of the agricultural population (a broad measure of agricultural income) was 0.9 percent, less than half the growth rate in other regions. Moreover,

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Consensus about the need for a Green Revolution in Africa is universal but the characteristics of the African continent call for a different approach. In comparison with Asia, Africa is heterogeneous in terms of agro-ecological conditions, farming systems, and types of crops planted. The FAO considers that there are 14 main farming systems in Sub-Saharan Africa (Staatz and Dembele, 2007). They depend rather weakly on rice or wheat, which have been the drivers of the Asian Green Revolution. Moreover, most agriculture in Africa is rain-fed (de Janvry and Sadoulet, 2009a), whereas the Green Revolution in Asia was partly driven by intensive irrigation. In fact, only 4 percent of crop area in Africa is irrigated, versus 34 percent in Asia. Another factor that makes the Sub-Saharan African context different is the underdevelopment of infrastructure, which hinders market access and leads to high transportation costs. ...

As a consequence, several geographically separate revolutions will have to take place across Sub-Saharan Africa (Staatz and Dembele, 2007). The source of agricultural growth also matters for its impact on poverty reduction. Agricultural growth in East Asia has been achieved with technologies increasing labor productivity and has led to large reductions in poverty. By contrast, in Africa, where labor productivity gains in agriculture have been small and most growth has come from land expansion, poverty reduction has also been low. In order to understand past developments in agriculture and predict future ones, the mechanisms behind agricultural development and growth must be identified.8 According to Schultz (1964), many farmers remain poor not because they are ‘‘backward’’ but because their government provides them with few technical and economic possibilities. Schultz stressed the importance of making inputs available to farmers (and increasing the capacity of industry to supply these inputs), generating new locally specific knowledge, and improving education about new seeds and technologies via extension services. Schultz’s model did not specify which institutions could influence this process and facilitate the adoption of new technologies by farmers. This shortcoming was addressed by Hayami and Ruttan (1971),

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Identifying the characteristics of agriculture in Africa does not explain why yields are low. There are two broad problems. The first is lack of appropriate technology and the second is lack of adoption. Whereas the former calls for better targeting of research to African countries and their conditions, the latter demands a reduction in the barriers to technology adoption. Of course, the problem of low yields may also be a combination of both inappropriate technology and barriers to adoption. Agricultural R&D and its capacity to produce more productive technologies are at the heart of long run agricultural growth. Such new technologies triggered the Green Revolution in Asia, and in light of the limited potential for land expansion in Sub-Saharan Africa such inventions are also strongly needed for African farmers.... Due to the heterogeneity of the countries and differences with, say, Asian countries, crops that have been planted in other regions might not be appropriate for Africa. Technological spillovers from high-income countries to low-income African countries are unlikely. Moreover, regional differences are large within the continent and prevent technology spillovers among African countries (Pardey et al., 2007;

Binswanger-Mkhize and McCalla, 2010). These differences call for more regional specific orientations in agricultural research, which take local conditions and constraints into account. In Africa, this has been addressed by both national as well as international research organizations. In 2006, for example, the CGIAR spent 48 percent of its total budget on activities directly related to Sub-Saharan Africa. But the contribution of CGIAR research to total yield growth has been much smaller in Sub-Saharan Africa than in other regions (BinswangerMkhize and McCalla, 2010). At the regional level, new institutions have been developed, such as national agricultural research systems (NARS) and the New Partnership for Africa’s Development (NEPAD). NEPAD, for example, has set a target of 6 percent agricultural growth in order to encourage public spending in this sector. Nevertheless, only a few African countries have reached that goal, whereas public spending in general has been low (during the past 30 years, 5–7 percent of the total national budget) and has fallen short of equivalent spending in other parts of the world (Fan et al., 2009). This is in stark contrast to potential returns to such expenditures. As reported by Fan et al. (2009), in some African countries, recent expenditures have been very successful in increasing agricultural productivity: one local currency unit spent on agricultural R&D has increased agricultural productivity by about 12 local currency units in Uganda and Tanzania. For Sub-Saharan Africa in general, the return to agricultural R&D and extension is estimated to be around 35 percent (IEG, 2011).

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