1. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 9-1 Copyright © 2012 Pearson Addison-Wesley. All rights reserved. Agricultural Transformation and Rural Development

2. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 9-2 The Imperative of Agricultural Progress and Rural Development Over 3 billion people lived in rural areas in 1997. This figure increased to over 3.3 billion by year 2007 (1/4 th in extreme poverty). People living in the countryside comprise considerably more than half the population of different nations of the world. Vast majority of the world’s poorest (over 2/3rd)people are located in rural areas and engaged primarily in subsistence agriculture.

3. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 9-3 Regional Distribution of Poverty (Ghana)

4. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 9-4 The Imperative of Agricultural Progress and Rural Development The basic concern of the people in rural areas is SURVIVAL. Estimated that more than 800 million of these people do not have enough food to meet their basic nutritional needs. If development is to take place and become self-sustaining, it will have to START in the RURAL AREAS in general and the AGRICULTURAL SECTOR in particular.

5. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 9-5 Current Economic Structure (Ghana) Source: Ghana Statistical Service *Revised

6. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 9-6 The Imperative of Agricultural Progress and Rural Development Heavy emphasis in the past on rapid industrialization may have been misplaced Agricultural development is now seen as an important part of any development strategy Three complementary elements of an agriculture– and employment-based strategy –Accelerated output growth through technological, institutional and price incentive changes designed to raise the productivity of small farmers –Rising domestic demand for agricultural output derived from an employment-oriented urban development strategy –Diversified, non-agricultural labor intensive rural development activities that are supported by the farming community There is a stress on Integrated Rural Development

7. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 9-7 The Imperative of Agricultural Progress and Rural Development 5 Main Questions that need to be asked about 3 rd World Agriculture and Rural Development –How can total agricultural output and productivity per capita be substantially increased in a manner that will directly benefit the average small farmer and the landless rural dweller while providing a sufficient food surplus to support a growing urban, industrial sector? –What is the process by which traditional low productivity peasant farms are transformed into high productivity commercial enterprises?

8. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 9-8 The Imperative of Agricultural Progress and Rural Development –When traditional family farmers and peasant cultivators resist change, is their behavior stubborn and irrational or are they acting rationally within the context of their particular economic development? –Are economic and price incentives sufficient to elicit output increases among peasant agriculturalists or are institutional and structural changes in rural farming systems also required? –Is raising agricultural productivity sufficient to improve rural life or must there be concomitant off- farm employment creation along with improvements in educational, medical and other social services? In other words, what do we mean by rural development and how can it be achieved?

9. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 9-9 Agricultural Growth: Past Progress and Current Challenges Although agriculture employs the majority of the developing country labor force, it accounts for a much lower share of total output Agricultural production is rising but unevenly The green revolution has helped increase agricultural productivity in developing countries –China has shown the largest growth of per capita food production in last two decades –Africa has shown significant decline in agricultural productivity in last two decades –Malnutrition and famine inspire calls for a new green revolution focused on Africa.

10. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 9-10 Region% of Labor Force in Agriculture Output in Agriculture as a Percentage of GDP South Asia6430 East Asia7018 Latin America2510 Africa6820 Output and employment in developing-world Agriculture: 2002

11. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 9-11 As countries develop, the shares of GDP and Labor in agriculture tend to decline, but with many idiosyncrasies

12. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 9-12 Cereal Yields by World Region, 1960-2005

13. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 9-13 The Structure of Agrarian Systems in the Developing World Two kinds of world agriculture –Highly Efficient agriculture of developed countries where substantial productive capacity and high output per worker permit a small number of farmers to feed entire nations. –Inefficient and low productivity agriculture of developing countries where in many instances the agricultural sector can barely sustain the farm population, let alone burgeoning urban population. –There are wide productivity gaps.

14. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 9-14 Land Productivity in Developed and Developing Countries

15. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 9-15 The Structure of Agrarian Systems in the Developing World Peasant Agriculture in Latin America, Asia, and Africa –Latin America and Asia: similarities and differences –The Latifundio–Minifundio dualistic pattern in Latin America –The fragmented and heavily congested dwarf land holdings in Asia –Africa: extensive cultivation patterns

16. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 9-16 The Structure of Agrarian Systems in the Developing World Agrarian Patterns in Latin America –Coexistence of latifundios and minifundios –Latifundios- very large landholdings that employ from 12 to even thousands of workers –Minifundios- small farms that can only provide for a single worker –Minifundios comprise up to 90% of the farms, but only occupy up to 17% of total agricultural land –Latifundios are inefficient- they do not exploit the economies of scale of large production; rather they underutilize the land Large landholdings- symbol of power rather than a productive asset Monitoring costs are higher for large landholdings

17. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 9-17 The Structure of Agrarian Systems in the Developing World Agrarian Patterns in Latin America –Apart from latifundios (large holdings) and minifundios (small farms) much production occurs on intermediate farm organizations; family farms and medium sized farms; better balance of labor and land Family farms- employ 2 to 4 people; medium-sized farms- 4 to 12 workers –Intermediate farms represent 50% of employment and agricultural output in countries like Venezuela, Brazil and Uruguay –Overall the agricultural sector seems to be doing well in many Latin American countries. –Extreme rural inequalities still persist.

18. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 9-18 The Structure of Agrarian Systems in the Developing World Fragmentation and Subdivision of Peasant Land in Asia : –Absentee landlordism and persistence of sharecroppers and tenant farmers. –Asia suffers from land scarcity: a large number of peasants crowded on too little land –Traditional agrarian structure is the village: the community owns land, and peasant families can use it to provide goods and services to the whole tribe –European colonization changed system by encouraging private property ownership. –This created landlords: who own the land, but usually live in the city; sharecroppers and tenant farmers: who actually work the land.

19. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 9-19 The Structure of Agrarian Systems in the Developing World Fragmentation and Subdivision of Peasant Land in Asia –Sharecropping occurs in about 85% of the land in Asia –Transition from subsistence to commercial production gave rise to the money-lender provides cash to the farmer to cover for seeds, fertilizers and food while the crop is harvested. Land plays role of collateral. –Money-lender phenomenon has led to many peasants losing their land, being forced to become tenants paying high rents, and being trapped in poverty –Rapid population growth has resulted in more fragmentation and peasant impoverishment.

20. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 9-20 Distribution of Farms and Farmland by Operational Farm Size and Land Tenure Status In Selected Developing Countries in Asia and Latin America

21. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 9-21 Changes in Farm Size and Land Distribution

22. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 9-22 Lorenz curves of agricultural land distribution by operational holdings

23. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 9-23 The Structure of Agrarian Systems in the Developing World (cont’d) Subsistence Agriculture and Extensive Cultivation in Africa –Vast majority of people farming small plots –Low productivity due to lack of technology –Shifting cultivation used widely –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 –Land ownership generally not an instrument of economic power –High concern about climate change impact –Need for an African new green revolution; there are hopeful signs that it is getting underway – AGRA.

24. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 9-24 Expansion of Modern Inputs in the World’s Developing Regions

25. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 9-25 The Important Role of Women 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 Because the active participation of women is critical to agricultural prosperity, policy design should ensure that women benefit equally from development efforts.

26. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 9-26 The Economics of Agricultural Development Three stages of agricultural development –Subsistence: low-productivity, subsistence level, peasant farm –Diversified: mixed family agriculture, part for consumption, part for sales –Specialized: high-productivity modern farm with specialized agriculture geared to commercial markets

27. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 9-27 The Economics of Agricultural Development Characteristics of subsistence farming –Most output produced for family consumption –Land and labor are the main factors of production, while capital investment is minimal –It is threatened by the failure of rains, and the potential appropriation of the land by the moneylender –Labor is underemployed most of the year, but highly occupied for planting and harvesting –Farmers are often resistant to technological innovation due in part to the limited access to credit, insurance and information: there is a lot of uncertainty and risk involved in subsistence farming

28. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 9-28 Microeconomics of Farmer Behavior and Agricultural Development Subsistence farming: risk aversion, uncertainty, and survival –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 observed –Risk-averse subsistence farmers often (not irrationally) can prefer technologies that combine low mean-per-hectare with low variance to alternative high yielding but higher risk technologies –Efforts to minimize risk and remove commercial and institutional obstacles to small farmer innovation are necessary.

29. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 9-29 Crop Yield Probability Densities of Two Different Farming Techniques

30. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 9-30 Microeconomics of Farmer Behavior and Agricultural Development Issues in sharecropping: a long debate –Intrinsically Inefficient due to poor incentives (Marshall) –Monitoring approach- landlords would establish contracts with tenants to use maximum effort (Cheung) –Screening argument (if high ability then take pure rental; if low ability then sharecropping) –Compromise between two types of risk (Stiglitz, others) Risk to landlord that tenant will not do much work and risk to tenant that fixed rent will in some years leave him no income –Empirical evidence for inefficiency of sharecropping from Ali Shaban (comparing same farmer, controlling for soil) Farmer used fewer inputs and produced less on sharecropped land than own land –Giving sharecroppers a larger share of the produce and security of tenure on land can increase efficiency.

31. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 9-31 Incentives under Sharecropping

32. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 9-32 Microeconomics of Farmer Behavior and Agricultural Development Issues in interlocking factor markets –Sharecropping as result of social inequality and market-failure –Landlord as employer, loan officer, ultimate customer to peasant tenant as well –Provides landlord abundant sources of monopoly and monopsony power.

33. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 9-33 Microeconomics of Farmer Behavior and Agricultural Development The Transition to Mixed and Diversified Farming –Successful transition from subsistence to diversified farming depends on the availability of credit, fertilizers, crop information and marketing facilities. Farmer needs to feel secure that his family will benefit from the change in order to guarantee successful transition. From Divergence to Specialization: Modern Commercial Farming –This type of farming usually emerges when other sectors of the economy, such as the industrial sector, have already developed. It usually involves capital intensive and labor-saving techniques of production.

34. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 9-34 Core Requirements of a Strategy of Agricultural and Rural Development Improving Small-Scale Agriculture –Technology and innovation –Institutional and pricing policies: Providing necessary economic incentives Conditions for Rural Development –Land Reform Create equitable distribution and tenure security –Supportive polices Access to credit and inputs to raise output and productivity –Integrated Development Objectives Efforts to raise both farm and nonfarm rural real incomes through job creation, rural industrialization and the increased provision of education, health and nutrition, housing and a variety of related social and welfare services.

35. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 9-35 Addendum: Non-farm Incomes and Employment in Rural Ghana Non-farm activities make up a significant and growing proportion of rural household incomes in developing countries Non-farm income as percent of total household income; 42% for Africa; 32% for Asia; 40% for Latin America Majority of Ghanaians live in rural areas (58%); they constitute majority of poor (86%). Agriculture is dominant economic activity (more than 90% of households) –accounts for greater share of household incomes –but rural households have to contend with variability of income from agriculture due to – seasonality of agriculture – erratic nature of rainfall patterns – low levels of irrigation usage – absence of credit and insurance markets Income from non-farm activities could be a good source of income and consumption smoothing.

36. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 9-36 Non-farm Incomes and Employment in Rural Ghana: Income shares

37. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 9-37 Non-farm Incomes and Employment in Rural Ghana: Participation rates

38. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 9-38 Non-farm Incomes and Employment in Rural Ghana Non-farm activities constitute an important source of income & employment for rural households in Ghana, –Non-farm activities can complement farm activities –Diversified households would be better able to smooth income and consumption than non-diversified households. Recommendations: –First, given their importance, it is imperative to promote non-farm income-earning opportunities to complement farm incomes (particularly for farm- based households) and to enhance access of rural households to these sources of income

39. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 9-39 Non-farm Incomes and Employment in Rural Ghana –Second, education is key determinant of non-farm income diversification (particularly, wage-income). Rural poverty and income inequality can be reduced by enhancing better access to education. Narrowing education inequality among rural households would create opportunities for effective participation in non-farm activities –Third, rural non-farm income is relatively concentrated among upper expenditure quintiles. Sign of entry barriers? Equipping poorer households, through training and acquisition of diverse forms of capital to engage in higher return non-farm activities will enable them reap greater benefits from diversification

40. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 9-40 Non-farm Incomes and Employment in Rural Ghana –Fourth, access to credit & electricity important for self- employment (small and micro enterprises). Policy should focus on enhancing access to small credits to bridge gap between asset-rich and asset-poor households. Rural electrification must be effectively implemented to promote village/ cottage industries –Finally, results show that access to physical infrastructure, like markets, are important to non-farm activities. Policy should therefore focus on improving access to well developed infrastructure to promote equitable development of the non-farm sector in rural Ghana.