1. AEB 4283: International Development Policy
Part II: Week 9
Today, Monday:
Chapter 9 “Agricultural Transformation and Rural Development”
Chapter 11 “Government Institutions and Roles of Market”
On Wednesday: In-Class Exam #2
Lectures from Week 7 (Monday) through Week 9 (Monday) covering Chapters 6, 7, 9, and 11. It will consist of multiple choice and short answers (short answers from Chapters 6 and 7)
Next Week:
Review Exam #2
Part III: International Problems and Policies
Assignment: Read Chapter 12 from Todaro and Smith

2. Chapter 9 Agricultural Transformation and Rural Development

3. Economic growth and agricultural transformation
As incomes rise, what happens to economic “structure”?
We will look at three aspects of the agricultural transformation:
Agriculture, industry and services as a share of income, employment and spending
The number of farmers and “industrialization” within agriculture
AGEC Fall 99 3

4. The Imperative of Agricultural Progress and Rural Development
The 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.
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.
Within agriculture, the structural transformation brings specialization for inputs and marketing

5. Figure 9.1 As Countries Develop, the Shares of GDP and Labor in Agriculture Tend to Decline

6. Agriculture as a share of GDP vs. GNP per capita, 1989
Declining agriculture GDP share strongly correlates with rising income!
Agriculture as a share of GDP (%)
Source: GW Norton and J Alwang, Introduction to Economics of Agricultural Development

7. Agriculture as a share of employment vs. GNP per capita, 1985
Agriculture’s share of employment declines with economic growth
Source: GW Norton and J Alwang, Introduction to Economics of Agricultural Development

8. Table 9.2 Labor and Land Productivity in Developed and Developing Countries

9. Agricultural Growth: Past Progress and Current Challenges
Malnutrition and famine inspire calls for a new green revolution focused on Africa.
Green revolution → boost in grain production associated with scientific discovery of new hybrid seed varieties of cereals that have resulted in high farm yields in many LDCs.
Food price spike of partly due to short term factors (e.g., droughts in highly productive agricultural lands) but long term factors (biofuels, the rise of China and India, embargoes on food exports by governments implementing food security policies) may herald return to persistently higher food prices in the years ahead.
New upward spike of prices by early 2011.
The presence of market failures - and poverty alleviation goals – create need for constructive government role in agriculture.

10. Figure 9.3 World Prices for Agricultural Commodities, 1974–2012

11. The Structure of Agrarian Systems in the Developing World
Three systems of agriculture:
Agriculture based countries, often subsistence, but agriculture makes up large part of growth.
Transforming countries, most of world’s rural people, large % of poverty incidence found there, low contribution of agriculture to growth.
Urbanized countries, half or more even of the poor found in urban areas.
The trend is from agriculture-based, to transforming, to urbanized economies as illustrated with the cases of India, China, Indonesia, and Brazil in Fig. 9.4.

12. Figure 9.4 Agriculture’s Contribution to Growth and the Rural Share in Poverty in Three Types of Countries

13. The Structure of Agrarian Systems in the Developing World (cont’d)
Peasant Agriculture in Latin America, Asia, and Africa
The Latifundio–Minifundio dualistic pattern in Latin America.
The fragmented and heavily congested dwarf land holdings in Asia.
Africa: extensive cultivation patterns.

14. Some Definitions
Latifundio: large landholding in Latin American agrarian system, capable of providing employment for over 12 people, owned by a small number of landlords, and comprising a large proportion of total agricultural land.
Minifundio: A landholding considered too small to provide adequate employment for a single family (Latin America).
Sharecropper: tenant peasant farmer whose crop has to be shared with landlord, who usually appropriates a large portion of total crop production.
Land reform: a deliberate attempt to organize and transform agrarian systems with the intention of fostering a more equal distribution of agricultural incomes and facilitating rural development.
Shifting cultivation: A peasant agricultural practice in Africa in which land is tilled by a family/community for cropping until it has been exhausted of fertility. The family/community moves to a new parcel of land, leaving the former one to regain fertility until eventually it can be cultivated again.

15. The Structure of Agrarian Systems in the Developing World (cont’d)
Agrarian Patterns in Latin America: Progress and Remaining Poverty Challenges
Apart from latifundios (large holdings) and minifundios (small farms) much production occurs on family farms and medium sized farms.
Latifundios (traditional ones, especially) are relatively inefficient; landlords/owners are sometimes less focused on the business of farming; and large farms typically entail higher transaction costs.
Overall the agricultural sector seems to be doing well in many Latin American countries. Two prominent examples: Chile (diversification), and Brazil (biofuels).
Extreme rural inequalities still persist.

16. The Structure of Agrarian Systems in the Developing World (cont’d)
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

17. The Structure of Agrarian Systems in the Developing World (cont’d)
Transforming Economies: Problems of Fragmentation and Subdivision of Peasant Land in Asia
Impact of colonial rule in strengthening land tenure systems of private property ownership and the consequent rise of moneylenders (people who lend money at exorbitant rates of interest – they are more interested in seizing the land of farmers than in the repayment of loans).
Contemporary landlordism in India and Pakistan involves absentee landlordism and persistence of sharecroppers and tenant farmers
Rapid population growth resulted in more fragmentation and peasant impoverishment

18. 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
Gender Role on Agriculture

19. Over the full span of development, employment shifts to services
Percent of workforce by sector in the United States,
today, about 80% of jobs are in services
banking, communications, wholesale and retail trade, professional & government services
in 1800, employment was 90% farming
in 1930s-70s, industry reached about %
agricultural
employment has stabilized
Source: U.S. Economic Report of the President 2007 (

20. Some conclusions on structural transformation as a share of the economy
As incomes rise, the farm sector declines as a share of employment, income & expenditure
The share of industry rises and then falls
The share of services rises
The share of agriculture eventually stabilizes
AGEC Fall 99 20

21. Farm employment and earnings in the United States, 1889-2000
Agricultural Employment as a Share of Civilian Employment and Real Farm Output as a Share of Real GDP
Until the 1930s, employment and output fell together
and then both stopped falling
…then employment fell much faster than output
SOURCE: U.S. Department of Commerce and the Federal Reserve Bank of St. Louis. Reprinted from K.L. Kliesen and W. Poole, "Agriculture Outcomes and Monetary Policy Actions: Kissin' Cousins?" Federal Reserve Bank of Sf. Louis Review 82 (3): 1-12.

22. Structural transformation: the story so far…
Farming declines as a fraction of the economy, as industry and services grow
Farmers’ incomes decline relative to other workers, but then catch up in the U.S.,
farmers’ incomes began to catch up in 1933
farmers’ incomes passed non-farmers in 1990s
What happens within agriculture?

23. Within agriculture, the structural transformation brings specialization for inputs and marketing
Source: Reprinted from World Bank, World Development Report Washington, DC: The World Bank (

24. Figure 9.5 Expansion of Modern Inputs in the World’s Developing Regions

25. Explaining Structural Transformation
Limited land area may matter most of all:
Because total land area is fixed,
farmers’ savings and investment eventually runs out of on-farm uses, and is applied to other uses
farmers’ earnings are linked to the number of farmers, acres per farmer and earnings per acre
AGEC Fall 99 25

26. The number of farmers rises then falls… until farmers’ incomes catch up to nonfarm earnings
Structural transformation within agriculture in USA:
farm numbers stabilized by
off-farm income and rising profits per acre;
latest census shows slight rise in no. of farms
Figure 5-3. Number and average size of farms in the United States,

27. Conclusions on economic growth and agricultural transformation
As incomes grow…
Farming declines as a fraction of the economy
in favor of industry and services
even within agriculture
Farmers’ incomes at first decline relative to others
but then farm incomes catch up
eventually farmer incomes pass non-farmers’ incomes
The number of farmers first rises and then falls
speed depends on both population and income growth
eventually the number of farmers stabilizes

28. Core Requirements of a Strategy of Agricultural and Rural Development
Improving small-scale agriculture
Institutional and pricing policies: Providing necessary economic incentives (e.g., pay small farmers market prices for their products, even if this means that prices in urban centers will increase).
How much will technology boom change Kenya? about how African farmers are using mobile phone apps to get better prices for their crops (
State marketing boards in developing countries are infamous for impoverishing farmers by paying them only a fraction of market prices – the Zanzibar clove industry in Tanzania is a textbook case.
Adapting to New opportunities and New Constraints (e.g., producer cooperatives for small farmers).

29. Core Requirements of a Strategy of Agricultural and Rural Development
Conditions for rural development
Land Reform (the idea is to give the land to the person who is working it).
Supportive polices (agricultural extension system in the U.S. is an example for the world).

30. Roles for Government in Agricultural Development
Environmental externalities
Agricultural research and extension services
Economies of scale in marketing
Providing institutions and infrastructure
Ensure shared growth in agriculture sector
Addressing poverty traps

31. Chapter 11 Development Policymaking and the Roles of Market, State, and Civil Society

32. Development Planning: Concepts and Rationale
The Planning Mystique
In the past, few doubted the importance and usefulness of national economic plans
Recently, however, disillusionment has set in
But a comprehensive development policy framework can play an important role in accelerating growth and reducing poverty

33. Development Planning: Concepts and Rationale
Basic concepts
Economic Planning: deliberate governmental attempt to coordinate economic decision making over the long run and to influence, direct, and in some cases even control the level and growth of a nation’s principal economic variables to achieve a predetermined set of development objectives.
Rationale:
Market failure
Resource mobilization and allocation
Attitudinal or psychological impact
Requirement to receive foreign aid

34. Three General Forms of Market Failure
Market failure → existence of market imperfections (monopoly power, lack of factor mobility, lack of knowledge) that weaken proper functioning of a market economy
The market cannot function properly or no market exists
The market exists but implies inefficient resource allocation
More expansively: the market produces undesirable results as measured by social objectives other than the allocation of resources
Often items such as more equal income distribution, and “merit goods” such as health, are treated as separate rationales for policy, outside of economic efficiency

35. Market and Government Failure: Broader Arguments
Government failure: in many cases, politicians and bureaucrats can be considered utility maximizers, not public interest maximizers
So can’t jump to conclusion that if economic theory says policy can fix market failures that it will do so in practice
Analysis of incentives for government failure guides reform, e.g. civil service reform, constitution design
Developing countries tend to have both high market failure and high government failures

36. Government Failure and Preferences for Markets over Planning
Reasons for Plan Failure
Deficiencies in the plans and their implementation
Insufficient and or unreliable data
Unanticipated economic disturbances, external and internal
Institutional weaknesses
Lack of political will
Conflict, post-conflict, and fragile states

37. Potential problems of government intervention in developing countries
Individuals know more about their preferences, circumstances
Government may increase risks by pointing all in same direction
Government may be more rigid and inflexible in decision making
Governments lack capabilities to administer detailed plans
Bureaucratic obstacles may block private sector initiative
Hard to replicate market incentive system within governments
Different parts of government may be poorly coordinated
Black markets place constraints on government
Controls create incentives for rent seeking (use of resources without providing any benefits to society)
Planning may be manipulated by narrow, privileged groups

38. The Market Economy
Sociocultural preconditions and economic requirements
Trust in banks, etc.
Law and order
Security of property and persons
Balance between competition and cooperation
Division of responsibility and diffusion of power
Social mobility
Materialistic values as a stimulus to greater production
Deferring gratification to generate private saving
Rationality
Honesty
Efficiency
Freedom of information
Free flows of information

39. The Market Economy Well functioning market economy requires
Clear property rights
Laws and courts to enforce them
Freedom to establish business
Stable currency and banking system
Public supervision of natural monopolies
Provision of adequate information to both buyers and sellers
Autonomous tastes (i.e., protection of consumer preferences from influence by producers and sellers).
Public management of externalities (harmful and beneficial)
Externality: a side effect of commercial activity that affects other parties without being captured in the cost of the goods or services involved. Eg: pollination of surrounding crops by bees kept for honey.
Stable monetary and fiscal policy instruments
Safety nets in times of need
Encouragement of innovation

40. The Market Economy
The “Washington Consensus” on the Role of the State in Development and its Limitations
The consensus reflected a free market approach to development espoused by the IMF, the World Bank, and key U.S. government agencies
The consensus’ general view is that excessive government intervention is detrimental to development

41. The Washington Consensus: Role of the State in Development and Its Subsequent Evolution
Toward a new consensus
New emphasis on government's responsibility toward poverty alleviation and inclusive growth
Provision of fundamental public goods
Importance of health and education
A recognition that markets can fail
Governments can help secure conditions for an effective market based economy

42. Development Political Economy
Democracy versus autocracy: which facilitates faster growth?
Neither system is perfect but a widespread view is that democracy is good for broader development objectives such as equity, education, health, and famine prevention.
Role of NGOs in development and the broader citizen sector

43. Figure 11.1 Global Trends in Governance, 1946-2008

44. Development Roles of NGOs and the Broader Citizen Sector
Comparative advantages of NGOs in
Innovative design and implementation
Program flexibility
Specialized technical knowledge
Provision of targeted local public goods
Common-property resource management design and implementation
Trust and Credibility
Representation and advocacy

45. Trends in Governance and Reform
Tackling the problem of corruption
Abuse of public trust for private gain
Good governance enhances capability to function
Effects of corruption fall disproportionately on the poor
Good governance is broader than simply an absence of corruption
Decentralization: it provides better incentives and checks against large-scale government corruption.

46. Figure 11.3 Corruption as a Regressive Tax: The Case of Ecuador