KOTOBE UNIVERSITY of EDUCATION

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ECONOMICS

COLLEGE OF BUSINESS, TECHNOLOGY AND VOCATIONAL EDUCATION

DEPARTMENT OF
ECONOMICS

ECONOMICS OF AGRICULTURE (ECON 3111)

BY:
GELETA A. (MSc)

March, 2025
ADDIS ABABA, ETHIOPIA
MODULE DESCRIPTION
Agricultural Economics is an applied social science that deals with how producers, consumers,
and societies use scarce resources in the production, marketing, and consumption of food and
fiber products. In agricultural markets, the forces of supply and demand are at work.
Economics of Agriculture, deals with basic concepts underlying peasant characteristics, peasant
production economics, theories of optimization and individual and household decision-making
process, agricultural marketing and financing, models of agricultural development, and policies
for solving the problems of agricultural and rural development in poor countries of the world.
Agricultural economics are studies about the allocation, distribution, and utilization of the
resources used, along with the commodities produced, by farming. Agricultural economics plays
a role in the economics of development, for a continuous level of farm surplus is one of the
wellsprings of technological and commercial growth.
Generally, agricultural economics influences the policies like food policy, agricultural policy,
and environmental policy.
MODULE OBJECTIVE
The objective the module is to;
 Provide students with an exposure to the major problems, theories, models and policies of
agricultural development.
 Acquaint students with preliminary knowledge of economic principles of agricultural
production in developing countries.
 Introduce students with peasant risk aversion and mitigation mechanisms under conditions
of uncertainty
 Acquaint students with agricultural optimization techniques and decision making
 Enable students acquire the knowledge and practices of agricultural marketing, financing
and production programing and forecasting approaches.
Table of Contents
MODULE DESCRIPTION.........................................................................................................................ii

MODULE OBJECTIVE.............................................................................................................................iii

1. INTRODUCTION TO AGRICULTURAL ECONOMICS.............................................................1

1.1. Definition and Scope of Economics of Agriculture..................................................................2

1.2. Agricultural Production Economics.........................................................................................4

1.3. Interdependence of Agriculture and Industry.........................................................................5

1.4. The Role of Agriculture on Economic Development...............................................................6

1.5. The Features of Agriculture......................................................................................................7

1.5.1. Factor Affecting the Progress of Agricultural Economics....................................................8

1.6. Systems of Agricultural Economics........................................................................................10

1.7. The Contribution of Agriculture to Economic Development...............................................10

1.7.1. Product Contribution......................................................................................................11

1.7.2. Factor Contribution.........................................................................................................12

1.7.3. Market Contribution.......................................................................................................14

1.7.4. Foreign Exchange Contribution.....................................................................................14

Chapter summery....................................................................................................................................16

Review Question.......................................................................................................................................17

CHAPTER TWO.......................................................................................................................................18

2. HISTORICAL DEVELOPMENT OF AGRICULTURE ECONOMICS...............................18

2.1.1. The Modernization and Growth Era (1950s and 1960s)...............................................20

2.1.2. The Equity-with-Growth Era (1970s).............................................................................22

2.1.3. The Economic Growth and Policy Reform Period of 1980s..........................................23

2.1.4. The Era of Economic Liberalization (Neo-Liberalism) (after 1980s)...........................25

Chapter summery....................................................................................................................................28

Review Question.......................................................................................................................................29
CHAPTER THREE.................................................................................................................................30

3. AGRICULTURE AND ECONOMIC GROWTH.........................................................................30

3.1. Approach of Agricultural Growth..........................................................................................31

3.1.1. Growth Stage Theories....................................................................................................31

3.1.2. Dual Economy Models.....................................................................................................34

3.1.3. The Structuralism and Dependency Perspectives.............................................................38

Chapter Summery...................................................................................................................................41

Review Question.......................................................................................................................................42

CHAPTER FOUR...............................................................................................................................43

4. AGRICULTURE AND STRUCTURAL TRANSFORMATION.............................................43

4.1. INTRODUCTION.....................................................................................................................43

4.1.1. Structural Transformation..................................................................................................44

4.1.2. Some Country Experiences in Agricultural Transformation..............................................49

4.2. Agricultural Development in the Postwar Period.......................................................................59

4.3. The Performance of Agriculture in Accomplishing Economic Growth and Poverty Reduction of
the World...............................................................................................................................................66

Chapter Summary...................................................................................................................................72

Review Question......................................................................................................................................73

CHAPTER FIVE...................................................................................................................................74

5. MODELS OF AGRICULTURAL GROWTH...............................................................................74

5.1. INTRODUCTION.....................................................................................................................74

4.1. Agricultural Growth...................................................................................................................75

4.1.1. The Frontier (Resource Exploitation) Model.....................................................................77

4.1.2. The Resource Conservation Model....................................................................................79

4.1.3. The Location Model (The Urban Industrial Impact Model)...............................................83

4.1.4. The Technology Diffusion Model......................................................................................85

 4.1.5. The High Payoff Inputs Model..........................................................................................87

4.1.6. The Induced Innovation Model..........................................................................................90

Chapter summery......................................................................................................................................92

Review Question.......................................................................................................................................93

CHAPTER SIX.........................................................................................................................................94

6. UNCERTAINTY AND FARM DECISION MAKING.....................................................................94

6.1. INTRODUCTION.........................................................................................................................94

6.2. Definitions of Risk and Uncertainty..........................................................................................95

6.3. Risk in Agriculture....................................................................................................................96

6.4. The Risk-Averse Farmer............................................................................................................97

6.4.1. Uncertainty and Farmers....................................................................................................97

6.4.2. Types of Uncertainty..........................................................................................................98

6.5. Analysis of Risk Behavior.........................................................................................................98

6.6. Policy Implications of Risk......................................................................................................104

6.7. The Drudgery-Averse Farmer..................................................................................................105

6.7.1. Farmers as Consumers and Produces...............................................................................105

6.7.2. The Chayanov Farm Household Model...........................................................................105

6.8. Some Revisions on Economic Theories...................................................................................105

Chapter Summery....................................................................................................................................114

Review Question.....................................................................................................................................115

CHAPTER SEVEN.................................................................................................................................116

7. GLOBAL ISSUES IN AGRICULTURE.........................................................................................116

7.2. Global Issues in Agriculture........................................................................................................117

7.3. Agricultural Policies of the Industrialized Countries and Their Impacts on LDCs..................119

7.3.1. The Domestic Policies of ICs...........................................................................................120

7.3.2. External Policies of ICs...................................................................................................122

 7.3.3. Import Quota....................................................................................................................122

7.3.4. Import Levy.....................................................................................................................123

7.3.5. Export Subsidy.................................................................................................................125

7.4. The Profile of Agricultural Protection in the Developed Countries.........................................126

7.5. World Trade in Agricultural Commodities..............................................................................129

7.5.1. Globalization....................................................................................................................129

7.6. Several Factors Explain This Anomalous Structural Shift In Africa........................................131

7.7. World Trade Institutions and Trade in Agricultural Commodities...........................................132

Chapter Summery....................................................................................................................................138

Review Question.....................................................................................................................................139

CHAPTER EIGHT..............................................................................................................................140

8. AGRICULTURAL POLICIES CONCEPTS AND FRAMEWORKS.........................................140

8.1. INTRODUCTION...................................................................................................................140

8.2. Agricultural Policy Analysis........................................................................................................141

8.3. Objectives of Policy Analysis......................................................................................................143

8.4. The Need for Policy.....................................................................................................................144

8.5. Agricultural Policy Formulation..................................................................................................145

8.5.1. Price Policy..........................................................................................................................146

8.5.2. Marketing policy..............................................................................................................147

8.5.3. Input Policy......................................................................................................................148

8.5.4. Credit policy....................................................................................................................150

8.5.5. Mechanization Policy.......................................................................................................152

8.5.6. Land reform policy..........................................................................................................152

8.5.7. Research and Extension Policy........................................................................................153

8.5.8. Irrigation policy...............................................................................................................154

8.6. Food Policies...............................................................................................................................154

 8.6.1. Entitlements to Food........................................................................................................157

8.6.2. Food Self-Sufficiency..........................................................................................................160

8.7. Structural Adjustment Program (SAP) and Agriculture...............................................................161

Chapter summery....................................................................................................................................169

Review Question.....................................................................................................................................170

Reference.................................................................................................................................................171
 CHAPTER ONE
1. INTRODUCTION TO AGRICULTURAL ECONOMICS
INTRODUCTION
These chapters introduce the basic concept and definition of agricultural economics. It provides a
detailed explanation of the issues allocated with under the subject matter of agricultural
economics. It also provides the various levels at which these issues could be considered. On the
other hand, deals with the unique features of agricultural economics.
Agricultural economics began as a branch of economics that specifically dealt with land usage; it
focused on maximizing the crop yield while maintaining a good soil ecosystem. Throughout the
20th century the discipline expanded and the current scope of the discipline is much broader. The
application of economic methods to optimizing the decisions made by agricultural producers,
agronomics, grew to prominence around the turn of the 20 th century. This discipline expanded
throughout the 20th century and gave a much broader scope to the present day agricultural
economics.
The field of agricultural economics is delineated by the application of economic science tools to
the agricultural sector. Thus, the meaning of agricultural economics, which refers to all economic
activities connected with the control of living organisms, such as plants and animals. These
economic activities gravitate around the production of food, and they involve many different
economic actors at different production and transformation stages. However, since agricultural
economics engrosses the application of economics to agriculture.
Chapter Objectives
After reading of this chapter the students will be able to:
 Understand the meaning of agricultural economics
 Recognize the issues dealt with in agricultural economics
 How to become an Agricultural Economists
 Understand the unique features of agriculture
1.1. Definition and Scope of Economics of Agriculture
Dear learners, please try to give your own definition of agricultural economics?
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The agricultural economics definition is the field studies issues related to farming, from how
farmers can manage resources effectively to ways farmers can adapt to changing market demand.
It seeks to give farmers practical economic advice and not just theories. An agricultural
economist is first, an economist, in that an agricultural economist knows economic theory
intimately. However, an agricultural economist is also an economist with a specialization in
agriculture. The primary interest is in applying economic logic to problems that occur in
agriculture. An agricultural economist needs to know economics, but knowledge of agriculture is
also important. If an agricultural economist is to portray relationships accurately using a model
of some component of an agricultural sector, the agricultural economist must know these
relationships.
Agricultural economics as a discipline that adopts the principle of economics to the problems of
agricultural production and people engaged in agriculture and allied activities. On the other hand,
Agricultural Economics is an applied science that dealing with how humans choose to use scarce
productive resources and technical knowledge to produce agricultural output and to distribute
these for consumption to various members of society over time. Generally;
Economics is the study of resource allocation under scarcity. Agricultural economics
originally applied the principles of economics to the production of crops and livestock a
discipline called agronomics.
Agronomics is a branch of economics that specifically dealt with land usage. It focused
on maximizing the yield of crops while maintaining a good soil ecosystem.
Agricultural economics is deals with how producers, consumers, and societies use
scarce and natural resources in the production, processing, marketing, and consumption
of food and fiber products.
Agricultural economics today includes a variety of applied areas, having considerable overlap
with conventional economics and it have made substantial contributions to research in
economics, econometrics, development economics, and environmental economics. Agricultural
practices lie on a spectrum depending upon the intensity and technology of the methods. At the
one end lies the subsistence farmer who farms a small area with limited inputs and produces only
enough food to meet the needs of his or her family (peasant farming). At the other end lies an
intensive modern agriculture which includes industrial agriculture, involving large fields and/or
number of animals, high resource inputs (pesticides, fertilizers, etc.), and a high level of
mechanization. Shifting cultivation, plantation agriculture, and pastoral agriculture give the other
major practices in agriculture.
In all-purpose, agricultural economics is concerned with the allocation of scarce resources
among the uses associated with producing, processing, distributing and consuming of farm
products. At this point, note that the problem of allocating scarce means for diversified uses is
more important in agriculture than any other sector as land, which is the basis of all agricultural
pursuits, is highly limited.
In its present shape, Agricultural Economics treaties with issues like:
 The contributions of agriculture to the economic development of a nation or a region
(particularly in the case of developing countries/regions);
 Problems surrounding the agricultural development of the developing countries;
 The agricultural policy practices of the developed (industrialized) countries both in their
domestic economies and international trade related to the agricultural sector, and the
practical impacts of these practices on the developing world;
 Types and analysis of agricultural policies, and the models of agricultural growth;
 Macroeconomic policies affecting the agricultural sector, and the policy debates of the third
world in relation to the sector
 The interrelationship among agriculture, food supply and population growth;
 The fundamental behavior of economic agents under different assumptions and
circumstances along with various theories/models of peasant systems of production; and
 The roles of rural institutions relating to agriculture and their bottlenecks.
The first six points above are generally macroeconomic in nature concentrating on the operation
of the whole agricultural sector as a component in the broader economic system. The last two
points in the above list present the microeconomic aspects of agricultural economics focusing on
the decision-making behavior of farmers and farm households under different states of
information (levels of uncertainty) and market conditions.
1.2. Agricultural Production Economics
Agricultural production economics is concerned primarily with economic theory as it relates to
the producer of agricultural commodities. In line with this, Agricultural Production Economics
studies the allocation, distribution, and utilization of the resources used, along with the
commodities produced, by farming. In practice, agricultural economics plays a role in the
economics of development, for a continuous level of farm surplus is one of the wellsprings of
technological and commercial growth.
Some major concerns in agricultural production economics include the following.
 Goals and objectives of the farm manager: Agricultural economists often assume that
the objective of any farm manager is that of maximizing profits, a measurement of which is
the difference between returns from the sale of crops and livestock less the costs of
producing these commodities. The goals and objectives of a farm manager are closely
intertwined with a person's psychological makeup, and the goals selected by a particular
person may have very little to do with profit maximization.
 Choice of outputs to be produced: A farm manager faces an array of options with
regard to what to produce given available land, labor, machinery, and equipment. The
manager must not only decide how much of each particular commodity to be produced, but
also how available resources are to be allocated among alternative commodities.
 Allocation of resources among outputs: Once decisions have been made with regard to
what commodity or commodities are to be produced, the farmer must decide how his or her
available resources are to be allocated among outputs.
 Assumption of risk and uncertainty: Models in production economics frequently assume
that the manager knows with certainty the applicable production function (for example, the
yield that would result for a crop if a particular amount of fertilizer were applied) and the
prices both for inputs to be purchased and outputs to be sold.
 The competitive economic environment in which the farm firm operates: Economists
often cite farming as the closest real world example of the traditional model of pure
competition. But the competitive environment under which a farmer operates depends
heavily on the particular commodity being produced.
1.3. Interdependence of Agriculture and Industry
Industries and agriculture are interdependent i.e. they depend upon each other. The source of raw
materials for industries comes from agriculture. Agriculture and industries are interrelated to
each other and move hand in hand which are explained in the following points:
1. Agriculture serves as a major source of raw materials to many industries.
2. Industries obtain raw materials from agriculture and produce finished products. For example
jute sugar cotton textiles etc.
3. Manufacturing industries which are involved in the production of tools equipment have
helped in modernizing agriculture.
4. Industries are also involved in producing fertilizers pesticides plastics and other tools for the
farmers.
5. Agro based industries have also provided employment in the rural areas.
Both agriculture and industry are interdependent in the following ways:
1. Supply of wage goods to the industrial sector: Industrial sectors consume various wage
goods for the production of industrial goods from the agricultural sector.
2. Supply of raw materials to agro-based industries: Indian agriculture also supplies
necessary raw materials to many of the agro-based industries.
3. Supply of labor force to the industrial sector: To a great extent, industrial workers hail
from the agricultural sector as there remains an excess supply of labor. It is also the source of
cheap labor for the industrial sector.
4. Creation of market for industrial goods: Indian agriculture provides a large market for a
variety of industrial goods
5. Source of domestic capital for industrial development: Income of the rural people is very
low. However, if their savings are mobilized properly, it can be a source of capital for
industrial development.
The issues in agricultural economics could be dealt with at global, regional and national levels.
At the global level, the differences between the agriculture of industrialized and developing
countries deserve attention. These differences are summarized as in the table under.
Table 1.1: Agricultural System in Developing and Developed World
INDUSTRIALIZED COUNTRIES (ICS) DEVELOPING COUNTRIES (DCS)
 Characterized by highly productive  Are characterized by low productivity
industrial or intensive agriculture, agriculture based on indigenous
based on modern science and technology
technology
 The main agricultural problem of the  Main agricultural problem is food
ICs is lack of market (excess supply) shortage (excess demand)
 Government subsidizes farmers and  Governments are advised not to
generally follow protective policies subsidize or protect their farmers
 Are donors of food aid and also  Are aid recipients and victims of food
practice damping or selling of food at damping
a lower than market price

In dealing with agriculture at the regional level, we focus on the problems of the agricultural
status of Sub-Saharan Africa. The problems are caused by both internal and external factors.
1.4. The Role of Agriculture on Economic Development
Ideas or models related to agricultural policies and policy reforms have occupied an immense
place in development economics. Despite the efforts made to design and implement various
policies, however, most countries of the world continue to be characterized by low productivity
and income in rural and urban areas alike. It seems that there is little (if any) improvement in the
agricultural sector, particularly in the third world countries.
By the contributions of agriculture, we are stressing the instrumental value of agriculture,
agriculture as a tool for the growth of other sectors. This particularly reflects the view common
in the 1950s and 1960s. As it is now accepted that agriculture has direct impacts on growth and
poverty reduction, the use of the roles of agriculture looks more appropriate.
Dear learners, we are now ready to briefly summarize the changing views of role of agriculture
in economic development since 1950s and their impact in economic policy, and we
systematically place the theories in historical perspective. To begin with, the history of
agricultural development ideas can be divided roughly in to three periods. Changing the direction
of our arrow, a progressive urban industrial economy contributes, in turn, to the rapid
development of agriculture. It does so by:
 Expanding the market for agricultural products
 Supplying the farm machinery, chemical fertilizers, and so on, that raise the level of
agricultural technology;
 Expanding productive employment opportunities for workers released from agriculture
by technological change; and
 Making possible improvements in the quality of rural life by raising standards of
consumption both in urban and in rural areas.
1.5. The Features of Agriculture
The diverse features of agriculture are explained in detail on the basis of the nature of the
agricultural sector itself as distinct from the non-agricultural sector such as the service sector.
The distinct features of agriculture as compared to the non-agricultural (industry or service)
sector are generally related to nature. The following are some:
 Heavy dependence on natural factors: climatic factors like rainfall and temperature highly
affect agricultural activities and their output.
 Related to the first fact, it is difficult to control the way agriculture goes/operates.
 Despite the measures taken such as developing irrigated agriculture in the world at large,
the problem is still significant in Sub-Saharan Africa (SSA) in particular.
 Inelastic supply of input: as the supply of land can hardly be increased, average
landholdings are usually small (and declining over time).
 Decisions in the agricultural sector are largely family affairs, not individualistic in nature.
 Limited choice of location: immobility of the input land implies this.
 Large time lag between expenditure and return in the agricultural sector.
 Low supply and demand price-elasticity for agricultural products: price-elasticity’s of
supply of agricultural products are low because of the seasonal nature of production; and,
price-elasticity of demand for agricultural commodities are low as these commodities are
largely necessity goods and their demand doesn’t change much with price changes.
 Low income elasticity of demand for agricultural products: as a society gets richer, the
demand for agricultural products grows less than proportionately as compared to the rise
in income (the share of these products in total expenditure falls). Thus, the share of
 agriculture (in GDP and employment) declines as development sets in. This point –
structural transformation – will be taken up in some detail in a latter chapter.
 High price fluctuations of agricultural commodities.
 Perishable nature of products and the widespread of joint products (like mutton and wool,
cereals and straw, etc.).
 Difficulty of product standardization: it is more problematic to standardize agricultural
products than industrial products.
 Related to many of the above characteristics, there is a problem of financing agricultural
activities.
1.5.1. Factor Affecting the Progress of Agricultural Economics
Farming is an old practice, but its modern forms are affected by various distinct economic
factors. The farming environment today is economically complex and competitive. It allows
farmers worldwide to choose what to grow from what’s produced globally. On the other hand,
governments offer financial incentives to farmers on specific types of crops. There are numerous
socio-cultural, economic, political, technological and infrastructural factors which also determine
the agricultural land use, cropping patterns and agricultural processes. Of these factors, land
tenancy, system of ownership, size of holdings, availability of labor and capital, religion, level of
technological development, accessibility to the market, irrigation facilities, agricultural research
and extension service, price incentives, government plans and international policies have a close
impact on agricultural activities.
Besides, the impact of these factors on the decision making processes of agriculture has been
illustrated by internal and external factors.
1. Internal Factor
The major internal factors of agricultural problems are:
1. Rapid growth of population
2. Policy problems: frequently changing policies, and the policies designed by the Western
following a top-down approach are obstacles to the performance of the sector in the
region.
3. Institutional and cultural factors: less developed institutions and poor culture for
agricultural development.
 4. Structural and infrastructural problems: the structure of the agricultural sector and the
level of infrastructural development in the region are generally unfavorable.
2. External Factors
The major external factors of agricultural problems are:
1. Historical factors such as slave trade and colonialism, and
2. The current international economic order (in areas of trade and finance).
The triangular trade route connecting Africa, Latin America and Europe, had contributed to the
underdevelopment of agriculture in SSA and underdevelopment of the region in general looking
below the diagram.

EUROPE

Raw Materials Guns and Manufactured

Goods

LATIN AMERICA AFRICA

Slave

The colonialists focused on cash crops for agricultural exports instead of for processing these
products within Africa. In addition, roads and communication systems were built to join each
agricultural site to the outside, not to join agricultural sites to each other. This is in sharp contrast
with what the colonizers in East Asia did, for instance, what Japan exercised in Taiwan.
A system of unequal exchange and deteriorating terms of trade of the region together with unfair
trade due to protective policies of the west all put the region (and its agriculture) in a
disadvantageous position. At the national level, the issues addressed by agricultural economics
comprise of both micro and macro aspects.
1.6. Systems of Agricultural Economics
Agriculture can be regarded as a system with inputs that have physical, cultural, economic and
behavioral elements. In areas where farming is less developed, physical factors are usually more
important, but as human inputs increases, these physical controls become less significant. This
system model can be applied to all types of farming, regardless of scale or location. It is the
variations in the inputs which are responsible for the different types and patterns of agriculture
around the world.
The leading classifications different types of farming are clear and Agricultural economics have
the following major Systems:
1. Farm Management Systems: concerned with the allocation of limited resources for
production of farm enterprises to maximize the farm income.
2. Agricultural Marketing Systems: as whatsoever marketable supply on the farm has to
find a suitable market and as the purchase of whatsoever inputs for farm production has to
be made, thorough knowledge of agricultural marketing is very essential to successfully
manage a farm.
3. Farm Finance Systems: deals with the acquisition and use of credit. A careful analysis of
use of funds is very important to get the maximum return out of the funds so obtained with
a minimum of default.
4. Agricultural Legislation Systems: provides the legal bounds within which the farmer can
operate. The proper knowledge of the tenancy legislation such as ceiling on holdings, crop
subsidies and price policies is crucial to make rational decisions.
5. Agricultural Cooperation Systems: concerned with issues like the principles and history
of cooperation, and the functioning of agricultural cooperatives.
6. Resource and Environmental Economics Systems: concerned with various ecological
aspects associated with agricultural development.
1.7. The Contribution of Agriculture to Economic Development
Agriculture constitutes the main source of employment of the majority of the world's poor. In
total, the share of agriculture in total employment in developing countries constitutes 53% of the
total workforce in 2004. In Sub-Saharan Africa 60% of the economically active population
works in the agricultural sectors.
Most industries in the country depend directly or indirectly on farm produce. In a highly
developed economy, only a small proportion of the population is engaged in agriculture,
agricultural productivity is relatively high, and most of the working population is engaged in the
production of other goods and services. Rapid industrial development is difficult to achieve
without the support of a progressive agricultural economy and a highly productive agricultural
sector is easier to achieve when it is part of a rapidly growing urban industrial economy.
Therefore, agriculture highly contributes to national economic development.
The contribution of agriculture to economic development is crucial. The contributions lie in:
1. Providing food to the rapidly expanding population
2. Increasing the demand for industrial products and thus necessitating the expansion of the
secondary and tertiary sectors
3. Providing additional foreign exchange earnings for the import of capital goods for
development through increased agriculture exports
4. Increasing rural incomes to be mobilized by the state
5. Providing productive employment
6. Improving the welfare of the rural people
According to Kuznet (1960), the contribution of the agricultural sector to economic
development constitutes four ways in which the agricultural sector can contribute to national
economic development. These contributions are termed:
1. Product contribution
2. Factor contribution
3. Market contribution, and
4. Foreign exchange contribution.
1.7.1. Product Contribution
Developing countries mostly specialize in the production of a few agricultural goods for exports.
As output and productivity of exportable goods expand, their exports increased and result in
large export earnings. Thus agricultural surplus leads to capital formation when capital goods are
imported with foreign exchange. Foreign exchange earnings can be used to build the efficiency
of other industries and help the establishment of new industries by importing scarce raw
materials, machines, capital equipment and technical know-how. This is what is called the
product contribution of agriculture, which first augments the growth of net output of the
economy, and then the growth of per capita output.
Agriculture provides the food necessary for an expanding population that is growing in income
and wealth, and raw materials needed for industries based on agricultural products as their
inputs. Most of the world civilizations were based on food surplus. Without food surplus,
everyone produces for him/herself and thus food production would be the only activity. With
food shortage and/or stagnant agricultural output, the growth of the other sectors and the growth
of the overall economy deteriorate. An explanation for this argument is as follows.
Food shortage raises the price of food. As food is the most important item in the budget of
people in the developing countries, this in turn results in an inflationary pressure. This
inflationary pressure is reinforced by the rise in the cost of production for the industrial sector
which follows from the pressure by workers in the sectors for increased wages due to food
shortage. This problem is twofold in areas/regions where there is a rapid population growth. To
illustrate this point, suppose the demand for food (D food) is defined as a function of population
d
growth rate (P), the level of per capita income (Y) and income elasticity of demand (ξ y ) as
d
D food= P +Y ξ y
(+) (−) (+)

In developing countries, where the level of per capita income (Y) is low and the income
d
elasticity of demand for food (ξ y ) is high, the demand for food rises rapidly with a rapidly
growing population. Thus, a stagnant agricultural sector would be unable to meet the demand for
food and thereby leads to slowdown in the non-agricultural sectors via rendering food production
to be the only activity and the inflationary pressures discussed above.
1.7.2. Factor Contribution
A developing country needs large amount of capital to finance the creation and expansion of the
infrastructure and for the development of basic and heavy industries. In the early stages of
development, increasing the marketable surplus from the rural sector without reducing the
consumption levels of farm population can provide capital. Labor as the principal input can be a
source of capital formation when it is reduced on the farm and employed in other productive
works. One major possibility of increasing farm receipts and thus capital formation is by
mobilizing increased farm incomes through agricultural taxation, land taxes, agricultural income
 tax, land registration charges, school fees, fee for providing agricultural technical services and
other types that cover the cost of services provided to the farm population. In general, the
agriculture sector occupies a central place in the national economy. The manner in which it
contributes to the economic development can be depicted in the chart below:
Agriculture

National Trade Foreign

Food A way of
income exchange
Rural life
Industry Vocation
Employment development
The agricultural sector can release workers needed for the production of non-agricultural goods
and services (labor transfer) and provide a source of capital that can be invested in improved
productive facilities in the rest of the economy (capital transfer).
I. Labor Transfer
The labor transfer from the agricultural sector to the non-agricultural sector is based on the
assumption that there is a surplus labor in the agricultural sector in the sense that emigration of
labor is not accompanied by a decline in agricultural output. In other words, the marginal
product of the emigrant is zero (in the agricultural sector) Lewis Model of Development.
Whether there is a surplus labor in the agricultural sector is an unsettled issue. It remains
controversial as long as there is a problem with measuring marginal productivity.
II. Capital Transfer
The transfer of (financial) capital from the agricultural to the non-agricultural sectors relies on
two preconditions:
i. There should be a positive net saving (S) within the agricultural sector,
i.e., Sagric = Yagric – Cagric > 0, where Y is output and C is consumption;
ii. The agricultural sector should save more than it needs for investment (I), i.e., Sagric > Iagric
Provided that these two conditions are satisfied, there are two mechanisms to transfer capital:
free-market transfer (where movements in relative prices may induce some farmers to move out
of the agricultural sector) and public transfer (through government actions). The public transfer
could be direct (involuntary) or indirect (voluntary).
Directly, the government may impose or raise the rate of agricultural tax (land tax, agricultural
income tax). Historically, Japan generated a huge portion of government revenue from
agricultural taxes at early ages of development. Indirectly, government can manipulate exchange
rates, say by overvaluing domestic currency, depressing farmers’ income and simultaneously
raising its revenue from import tariffs (as the overvaluation encourages imports). Alternatively,
government could use any policy measure which turns commodity terms of trade against
agriculture. This makes the non-agricultural sectors more profitable and more attractive than the
agricultural sector. As a result, farmers themselves voluntarily transfer their capital to the other
sectors. This indirect method (of course, alongside the direct method) was common in the Soviet
Union during the 1930s.
1.7.3. Market Contribution
A rise in rural purchasing power, as a result of the increased agricultural surplus there is a great
stimulus to increased development. The market for manufactured goods is very small in
developing countries where peasants, farm laborers and their families are too poor to buy factory
goods. Increased rural purchasing power caused by expansion of agricultural output and
productivity will tend to raise the demand for manufactured goods and extend the size of the
market. This will lead to the expansion of the industrial sector. Moreover, the demand for such
inputs as fertilizers, better tools, implements, tractors, irrigated facilities in the agricultural
sectors will lead to the expansion of the industrial sector. Besides, transport and communications
will expand. The long-run effect of these expansions will be higher profits, which tend to
increase the rate of capital formation through their investment.
The agricultural sector can serve as a market for non-farm consumer goods and services as well
as farm producer goods, thus providing a stimulus for the expansion of employment and output
in the non-agricultural sectors. The extent to which agriculture provides this type of contribution
is highly dependent on the purchasing power of the (rural) agrarian population.
1.7.4. Foreign Exchange Contribution
This is the defining macroeconomic contribution of (tradable) agriculture to aggregate growth
through allowing imports of inputs and capital goods. Most major economies have floating
exchange rates, which leads to currency volatility. As well as economic performance, inflation
expectations, and interest rate differentials, capital movements have a significant impact on
exchange rates. Normal daily activities are carried out in the native currency. The main
contribution is for providing additional foreign exchange earnings for the import of capital goods
for the economic development through increased agriculture export products. These are the
importance of foreign exchange market for country’s economy.
Chapter summery
 Agricultural economics can be understood as a functional meadow of economics which deals
with the application of economic hypothesis in optimizing the production and distribution of
food and fiber.
 Agricultural economics is a branch of knowledge which ties agriculture and economics
together.
 Agricultural Economics is an applied science that dealing with how humans choose to use
scarce productive resources and technical knowledge to produce agricultural output and to
distribute these for consumption to various members of society over time.
 Agricultural economics as a discipline that adopts the principle of economics to the problems
of agricultural production and people engaged in agriculture and allied activities.
 Agricultural economics is an applied social science that deals with how producers,
consumers, and societies use scarce and natural resources in the production, processing,
marketing, and consumption of food and fiber products.
 Agricultural production economics is concerned primarily with economic theory as it relates
to the producer of agricultural commodities.
 Agriculture mentions to the production of goods through the growing of plants and the
raising of domesticated animals.
 Agriculture is the purposeful tending of crops and livestock. It includes group of interrelated
activities that encompasses the planting, raising, subsequent care and final disposition of a
wide range of crops and livestock.
 The agricultural sector can serve as a market for non-farm consumer goods and services as
well as farm producer goods, thus providing a stimulus for the expansion of employment and
output in the non-agricultural sectors.
Review Question
1. To become an economist, how we relate agricultural economics with economic theory?
2. Let us come to very practical production method that agriculturalists apply today. Do you its
contribution of agricultural economics for economic development?
 CHAPTER TWO
2. HISTORICAL DEVELOPMENT OF AGRICULTURE ECONOMICS
INTRODUCTION
The development of agriculture necessitates more investment. More investment means more
saving in the agricultural sector. If the population continues to grow, the total savings in the
agricultural sector may not increase even when there is some initial rise in production per acre.
The extra output may be consumed by the growing population. Since the 1970s, agricultural
economics has primarily focused on seven main topics, according to Ford Runge: agricultural
environment and resources; risk and uncertainty; food and consumer economics; prices and
incomes; market structures; trade and development; and technical change and human capital. The
development of agricultural economic theory and practical experience, promote the integration of
global agricultural economy, improve the status quo of global chemical agriculture, develop
global modern ecological agriculture, ensure global food and food safety, and improve the health
of human life.
The classic historical study of American agricultural economic development thoroughly revised
and updated. Not only describes but analyzes and explains the economic behavior of agriculture
as a functional sector of the economy in the process of economic development. There is no
substitute. The Development of American Agriculture is unique. James T. Bonnen Michigan
State University in this landmark survey of the history of American agriculture from 1607 to the
present, Willard Cochrane provides a thorough analysis of U.S. agricultural development.
Cochrane first offers a general history of agriculture in America and then continues with an
extensive examination of the structural, political, and economic forces that have shaped
American agriculture through the years.
Finally, he presents a thought-provoking theoretical model of agricultural development in the
United States for the period 1950-90. In addition to providing fully updated historical and
statistical material, this fully revised second edition of The Development of American
Agriculture emphasizes the impact of the widened international market on American agriculture
and includes a new chapter on the impact of environmental policy on agricultural development.
The Development of American Agriculture is an indispensable resource for anyone concerned
with economic development in general and agricultural economic development in particular.
The origins of the field, now reach back in many directions and over a long period of time. The
filed came from two separate sources from the physical sciences, and later, from economic
theorists. Since agriculture and its production systems are influenced by physical (topography,
climate), social (tradition, culture) and economic (market, infrastructure) factors, a
comprehensive body of science, which includes physical science, social science, and economic
theory, is fundamental. The application of economic theory to agricultural problems has gone
through a process of slow acceptance. The severity and length of the agricultural depression
beginning in the 1880s caused increasing attention to be devoted to its causes and possible
solutions. Primarily agronomists and horticulturalists made the most notable early efforts. They
recognized that the ability to grow plants and animals was not sufficient to make farmers
succeed.
Agricultural Economics is an important subject area because it is concerned with society's basic
needs. Getting food and other agricultural products to all people in the world in the right form at
the right time is an extremely complex process. Agriculture began independently in different
parts of the globe, and included a diverse range of taxa. At least eleven separate regions of the
Old and New World were involved as independent centers of origin.
The development of agriculture about many years ago changed the way humans lived. They
switched from nomadic hunter-gatherer lifestyles to permanent settlements and farming.
Irrigation, crop rotation, and fertilizers were introduced soon after the Neolithic Revolution and
developed much further in the past of many years.
Agriculture in the developed nations, and to a lesser extent in the developing world, has seen
large rises in productivity as human labor has been replaced by mechanization, and assisted by
synthetic fertilizers, pesticides, and selective breeding. The Haber-Bosch process allowed the
synthesis of ammonium nitrate fertilizer on an industrial scale, greatly increasing crop yields.
Modern agriculture has raised social, political, and environmental issues including
overpopulation, water pollution, biofuels, genetically modified organisms, tariffs and farm
subsidies. In response, organic farming developed in the twentieth century as an alternative to the
use of synthetic pesticides.
Two polar views regarding the centrality of agriculture’s role in the process of economic growth
are prominent in the literature of economic development. At one pole, a substantial literature
argues that agricultural development is necessary for overall economic transformation of a
country. The contribution of agriculture in food, raw materials, and financial surplus (including
foreign exchange) to invest is essential for the process of industrialization in its early stages,
during which by definition, the industrial sector is small. At the other pole is the view that
economies can always bypass this process of agricultural development and instead invest to build
an industrial base. This latter view, popular in the 1950s, also has recent adherents.
The question of which view is correct remains open. That is, there are disagreements on whether
policy makers can draw off resources from agriculture without a significant damage or if prior
investments in agricultural productivity are necessary to enable these resource transfers to take
place without raising food prices and urban wage rates, and choking off industrial development.
In this regard, the developing countries of the world have experienced three major development
strategies since the 1950s. Each of these has had some implication for the development of the
agricultural sector of these countries. Now, let us see the three ideas of development, along the
emphasis each gave to agriculture, in turn.
The ideas emphasize one and/or the other of the pillar objectives of economic policy. These are
economic growth efficiency, and increased productivity and equity justice or fairness, rural
development, and reducing the income gap between the poor and the rich. The ideas are named
by their emphasis and the eras in which they were advocated and are presented as under. To
begin with, the history of agricultural development ideas can be divided roughly in to three
periods. These are;
1. The Economic Growth and Modernization Era (1950-1960s)
2. The Growth-with-Equity Period (1970s)
3. The Economic Growth and Policy Reform Period (1980s)
4. The Era of Economic Liberalization (Neo-Liberalism) (after 1980s)
2.1.1. The Modernization and Growth Era (1950s and 1960s)
The source of inspiration for the idea was the success of the Marshall Plan in the post-World
War II (WWII) Western Europe. The Marshall Plan originally emerged as the European
Recovery Program to help the region out of the acute shortage of capital for investment and to
meet the acute need of the region for physical reconstruction. Another motive for the Marshall
Plan was the prevention of the European countries from joining the Eastern (Socialist) Block.
Driven by the success of this plan, development economists and aid donors like the World Bank
prescribed the same policy for all the developing countries. The focus everywhere was on the
industrial sector, and thus the agricultural sector was highly marginalized.
Early development strategists, notably Lewis and Hirschman emphasized the importance of
promoting industrialization first and advocated focusing development resources in industries
with strong spillovers throughout the economy. Hirschman in particular, in his influential early
writings, rested on the supposedly weak production linkages between agriculture and the rest of
the economy for his pro-industrial prescription.
Agriculture certainly stands condemned on the ground of its lack of direct stimulus to the setting
up of new activities through linkage effects; and, the superiority of manufacturing in this respect
is overwhelming. This view contributed to a common neglect of agriculture, particularly during
the 1960s.
The result in Africa (like in the majority of other cases) was:
 Economic growth, but not development,
 Increased income inequality, and
 Shortage of food and foreign exchange.
Ethiopia was perhaps the first to adopt the idea and launch three five-year plans. The industrial
sector, and particularly infrastructure, was emphasized. Ethiopia was a net exporter of food items
at the same time of food shortage in the economy. In spite of Hirschman’s confident assertion,
(import-substituting) industrialization strategies broadly failed to stimulate broad-based
economic growth. In contrast with Hirschman’s claim of feeble agricultural growth linkages,
agriculture proved to have strong growth linkages both production and consumption linkages.
Production linkages include backward linkages the input demands by farmers for farm
equipment, pumps, fuel, fertilizer and repair services as well as forward linkages from
agriculture to non-farm processors of agricultural raw materials. In prosperous agricultural
zones, these linkages prove substantial as pump suppliers, input dealers, grain traders, processing
industries and transporters emerge to supply agricultural inputs and process and distribute farm
output.
Consumption linkages include spending by farm families on locally produced consumer goods
and services. Early work in Green Revolution India indicated that higher-income small farmers
spent about half of their incremental farm income on non-farm goods and services as well as
another third on perishable agricultural commodities such as milk, fruit and vegetables. Thus,
consumption linkages from growing farm income can induce sizable second rounds of rural
growth via increased consumer demand for non-agricultural goods and services as well as
perishable, high-value farm commodities such as milk, meat and vegetables. In places like India,
where many non-farm goods and services are produced by labor-intensive methods, the spending
multipliers not only accelerate growth but also enhance the equity of agriculture-led growth.
Following an initial spurt in farm productivity and incomes, production and consumption
linkages together induce second rounds of demand-led growth. Empirical evidence from around
the developing world suggests that a $1 increase in agricultural income will generate an
additional $0.30 to $0.80 income in rural non-farm economy. Linkages are even higher when
consumption of urban produced products is included. In Africa and Asia, consumption linkages
typically account for over 80 percent total spending linkages.
2.1.2. The Equity-with-Growth Era (1970s)
As a result of the failure of the first idea, many development specialists have come to believe that
early investments in agricultural productivity constitute a necessary precondition for overall
economic growth. For without rising farm productivity, the transfer of labor and capital from
agriculture will lead to falling agricultural output, rising food prices and growing poverty.
Consequently, agriculture (and rural development in general) got attention.
The 1970s came up with an alternative the idea of equity-with-growth. The sources of inspiration
for this second idea were few third world countries (like Sri Lanka). As the trickle down
hypothesis of the 1950s and 60s didn’t hold, this time the emphasis was on reducing the income
gap between the poor and the rich, and improving the livelihood of the rural population through a
strong state. This policy direction was also called The Basic Needs Approach by ILO
(International Labor Organization). The recommended policy instruments of the time were:
 Asset redistribution in favor of the rural poor: land reform turned out to be the main
issue of discussion in many countries.
 Projects: considering projects as the cutting edge of development, donors (particularly
the World Bank) financed projects after projects.
Despite the strong pressure from the West (SIDA, USAID, WB, etc.), particularly for land
reform, the end result was a failure in most cases. Most poor countries found it difficult to
address the issues of growth and equity simultaneously. Even some countries which had the
potential to do so emphasized only one of the two, largely the equity issue. Although Ethiopia
adopted the policy much earlier than other African countries, the policy was unsuccessful. As the
issue of land reform faced obstacle from the parliament of the emperor, there was no
redistribution of land.
2.1.3. The Economic Growth and Policy Reform Period of 1980s
Distance learners, we have so far discussed two views concerning the role of agriculture in
economic development: The Economic Growth with Modernization Era, and the Growth-with-
Equity Period. We are now remaining with the third view. Let us dwell on it and have a clear
picture. This period witnessed a major shift in development economics towards economic
growth, policy reform and market liberalization. The shift from microeconomic analysis of
agricultural projects to macro policies was considered as a cutting edge of development in food
policy analysis, and it was the dominant development theme of the 1980s.
In Africa, policy reform was strongly advocated in the Word Bank's report, and structural
adjustment programs were launched or in underway in the mid of 1980s. In Asia, agricultural
development proceeded more rapidly than expected and can be considered as major success story
of the 1980s. For example, India achieved food self-sufficiency in grain production in the mid-
1980s. In the policy reform era, a major analytical advance in the way economists viewed policy
was the development of the Food Policy Analysis Approach. The approach synthesized work in a
number of areas, outlining how to trace the effects of macroeconomic adjustments as well as
sectorial level policies on food production, income generation, and consumption patterns of the
poor.
The food policy analysis approach has set two distinguishing characteristics apart from the
production incentive school, and the basic needs school. The production incentive school
emphasizes the need to get prices high, i.e. raising agricultural price in order to increase farmers’
incentive to produce. The basic needs school stressed the need to keep price low in order to
ensure that the poor could afford an adequate diet.
The Food Policy Analysis Approach recognized that the production concerns of the production
incentive school and the consumption concerns of the basic needs school were both legitimate,
and it showed how they will be linked through food prices. Food policy analysis hence forms a
bridge between the two approaches. In addition, it recognized in a more explicit manner that
policy formation takes place in an open economy where the financial and commodity markets are
increasingly integrated; thus calls for the integration of food and agricultural policy with macro
policies such as the exchange rate and interest rates, in a world economy framework.
In the mid-1980, policy makers in many countries become interestingly concerned about Food
Security. Despite the achievement of national food self-sufficiency in major Asian countries, it
was apparent that a large percentage of people neither had the access to resources (land, credit)
nor the purchasing power to secure their food needs. Thus many works stressed that food
security should involve assuring both an adequate supply of food (through own production and
trade) and access by the population to that supply. Food Security can be defined as access by all
people at all times to enough food for an active and healthy life. Similarly, it could be defined as
the absence of hunger and malnutrition. The basic concepts are:
 Sufficiency of food (calorie requirement)
 Access to food (produce, purchase, gift)
 Security (vulnerability, risk)
 Time (chronic, transitory)
Acid rain, pollution, environmental degradation, and sustainable agriculture also emerged as
central issues in the 1980s, especially following the release of the influential Bruntland Report,
Our Common Future. Concerns about sustainability were raised at several levels: local,
institutional, national, and global. Increasing population pressure on fragile environments led to
worries that existing farming systems in many parts of the world were no longer sustainable.
Dear learners; now let us have a concise summary of the different views that have been
influencing agricultural production systems, agricultural growth, and the overall economic
development of countries in the world overtime, and draw some policy implications for the
future. To begin with, in the 1950s and 1960s, economists had developed simple two-sector
models to analyze the role of agriculture in relation to industry. During the 1970s analysts
developed an increasingly detailed micro theoretical and empirical understanding of the rural
economy with the wider economic system. During the 1980s, however, many economists
realized the importance of broader macroeconomic analysis for the quest of better understanding.
So by the end of 1980s development thinking had come nearly full circle. From all these views,
we now can draw some important lessons for 2000s.
2.1.4. The Era of Economic Liberalization (Neo-Liberalism) (after 1980s)
Developing countries, especially Africa, were blamed for exercising too much state intervention
(the visible hand) that was claimed to have hindered their development efforts. Western
economists once again argued that states should leave their place for the invisible hand and
should limit their roles to regulating legislations and providing infrastructure. The Berg Report,
which advocated this idea of economic liberalization, paved the way for the Structural
Adjustment Programs (SAP) and its extensions like PRSP (Poverty Reduction Strategy Paper).
SAP (which basically refers broadly to the restructuring an economy in line with free market
system) the implementation of which was to be approved by the WB and the IMF, emerged in
two phases: SAP without Human Face (1980s and mid-1990s), and SAP with Human Face (since
mid-1990s). The second one, SAP with human face, was contributed by UNICEF. SAP without
human face, like the growth and modernization era of the 1950s and 1960s, neglected the issue
of equity. However, it differs from the growth and modernization era in that the WB gave
emphasis to the agricultural sector in this case. Like the second era of 1970s, SAP with human
faces also focused on reducing poverty, but this time with a weak state.
In general, SAP followed a top-down approach where states are implementers only. Despite the
claim of the West, the success of some East Asian countries has much more to do with their
cultural and far looking leadership than with SAP. In the 1980s, Ethiopia was at the exact
opposite of economic liberalization.
The Dergue Regime agreed to take the idea around 1988 after a series of negotiations with the
WB. Declaring a mixed economy in March 1990, and loosening the practices of collective farms
and villagization, Dergue came to an end in 1991. The WB’s policy was then embraced by the
new government in 1991. With the exception of a few cases, all the three development strategies
have turned out to be unsuccessful. Among the main reasons for the widespread failure of these
ideas or theories are:
1) The origin of these ideas: because these ideas are developed by economists of the West with
no or limited participation of farmers in generating the ideas the theories/models so
developed do not reflect the prevailing conditions of the poor nations. The Western
economists, associated with the WB and the IMF, are criticized to start with economies, not
people; with the macro, not the micro; with the view from the office, not the view from the
 field. And in consequence their prescriptions tend to be uniform, standard and for universal
application.
2) Even these ideas (and specific issues of priority within an idea) are not stable; they change
frequently
3) Lack of political commitment on the part of most leaders (governments) of LDCs.
4) As agriculture is not only an economic activity but also the way of life for farmers in LDCs,
farmers are reluctant in adopting new ideas.
5) Lack of administrative and technical capabilities to implement a national development plan
and neglect of the organizational structures necessary to facilitate large-scale economic
development. This last point was especially acute for Ethiopia during the imperial regime.
Scholars of the developing world (like Samir Amin, Arghiri Emmanuel, Raúl Prebisch and Hans
Singer) have also developed some alternative theories (ideas) of development. These ideas
generally emphasized that (1) the prevailing structure of dependence of the LDCs (the periphery)
on the industrialized countries (the metropolis/center) severely hurt the LDCs, and (2)
development comes from self-reliance.
Dependence was defined as a situation in which the economy of a certain country is conditioned
by the development and expansion of another economy to which the former is subjected. The
world had developed into a center-periphery relationship among nations, where the third world
was regressing into becoming the producer of raw materials for first world manufacturers and
were thus condemned to a peripheral and dependent role in the world economy.
In the face of such dependence:
 There is a net transfer of capital from the peripheries to the metropolis.
Price of Exports
=
 The terms of trade (ToT Price of Im ports ) moves against the periphery which exports
raw materials and primary commodities and in favor of the developed world exporting
manufactured goods.
 Problems like inflation and recession, whenever they prevail in the metropolis, are
imported to LDCs with harsher consequences. In short, when the metropolitans sneeze,
the peripheries catch cold.
The idea of independent and self-reliant growth, developed roughly parallel to the emergence of
Neo-Liberalism (in the 1980s), was advocated by the then leaders of Africa. A good reflection of
this is the Lagos Plan of Action. But, it turned out to be a paper-tiger. The problem of Africa is,
thus, not the lack of alternative ideas but the problem of implementation.
Chapter summery
 Agriculture highly contributes to national economic development.
 Classical economists, on the other hand, believed that diminishing marginal returns to
agricultural land would eventually lead to overall economic stagnation.
Review Question
Discuss the following questions
1. What are the history and the evolution of agricultural economics?
2. The reason why agriculture and overall economic development of developing countries has
been stagnant for many decades?
3. Historically, how agricultural economics is developing? Discuss in detail.
 CHAPTER THREE
3. AGRICULTURE AND ECONOMIC GROWTH
INTRODUCTION
As an economist has been involved in the analysis of development problems in nations
characterized by static agricultural technology and rapid growth in demand for agricultural
products, attention has shifted increasingly to a concern with the conditions under which an
agricultural surplus can occur and be sustained. Agriculture is also crucial to economic growth
and accounting for 4% of global gross domestic product (GDP) and in some least developing
countries, it can account for more than 25% of GDP.
Agriculture is the mainstay of the LDC economies, underpinning their food security, export
earnings and rural development. Yet, their agricultural production for the domestic and export
markets have lagged behind, with growth in per caput output declining in the 1990s. Now we
are in a position to investigate different descriptive approaches that have been developed by
political economists to trace back why agricultural and economic stagnation has occurred in
developing countries and the possible remedial measures.
3.1. Approach of Agricultural Growth
The agricultural system approach inter-connects land use planning and economic development.
For example, Agro-food impacts are considered when municipal decisions are made on roads,
bridges and future growth areas. The infrastructure and servicing needs of the agro-food sector
are addressed.
Three approaches have been used frequently in attempts to stake out the boundaries of a new
development economics:
1. The Growth-Stage/Leading Sector approach
2. The Dual-Economy Approach
3. The Structuralism and Dependency perspectives
3.1.1. Growth Stage Theories
The earlier growth stage literature was primarily a product of the 19 th century and the promotion
of industrialization and economic growth were regarded as major goals. With the rebirth of
interest in economic growth, economists have joined together in an effort to satisfy the demand
for a general development theory by dividing economic history into discrete linear segments.
The general growth-stage development theories through historical perspective are:
1. The German tradition theory
2. The Structural transformation theory
3. The Leading sector theory
3.1.1.1. The German Tradition Theory
There were two major traditional schools in the 19th century German literature of growth stage
theories:-
 Fredric List and the German historical school
 Karl Marx and the Marxists school
Both List and Marx emphasized five stages in the development process, but their stages were
based on entirely different principles.
List’s stages are Marxist stages are
- Savage - Primitive communism
- Pastoral - Ancient slavery
- Agricultural - Medieval feudalism
- Agricultural manufacturing - Industrial capitalism
- Agricultural-manufacturing - commercial - socialism
In List's view, progress in agriculture could occur only under the stimulus of export demand or
the impact of domestic industrial development. Of these, domestic industrial development was
considered as the more important generator of agricultural progress because of the double impact
of the increased demand for farm products from non-farm sector and the development of more
efficient production methods. This will be made by encouraging industrialization through the
protection of infant industries to promote both import substitutes and industrial exports. Marx
based his classification on changes in production technology and associated changes in the
system of property rights and ideology.
In Marxist system, economies evolve through these stages, driven by the forces generated by
struggles between two classes, one controlling the means of production to combine with labor
and the other possessing no means of production but labor. The class struggle reflects the
continuing contradiction between the evolution of economic institutions and progress in
production technology.
3.1.1.2. Structural Transformation Theory
List’s last three stages can be termed as primary, secondary and tertiary production stages.
According to structural transformation theorists (mainly Fischer and Clark), the steady shift of
employment and investment from the essential primary activities to secondary activities and still
to greater extent into tertiary production accompanies economic growth.
The economic growth, which accompanies this transformation, is achieved by:
1. Increases in output per worker in any sector, and
2. Transfer of labor and capital from sectors with low output per worker to sectors with
higher output per worker.
Fischer, as did List, held that such a transition was closely associated with the advance of science
and technology.

Criticism
i) Official statistics conceal that there is high proportion of time spent by the rural
population in secondary and tertiary activities and this disproves the greater share to be
given for secondary and tertiary activities to foster economic growth.
 ii) Dovring demonstrated that the size of the agricultural sector relative to the rest of the
economy limits the rate at which workers can be shifted to nonagricultural employment.
In an economy that is primarily agricultural, the share of labor in agriculture will decline
slowly even when the growth of employment in the industrial and service sectors is very
rapid.
iii) According to Johnston and Kelby, the domestic demand for the commodities produced by
the agricultural sector is limited by the small size of the urban-industrial sector and the
low income of workers in the industrial and service sectors.
iv) The above demand side constraint in turn limits the farm sector demand for manufactured
consumer goods and purchased input (fertilizer, farm equipment, etc).
3.1.1.3. Leading Sectors Theory
The decline of professional interest in the Fischer-Clark stages during the 1960s was due, at least
in part, to the emergence of Rostow’s ‘leading sector’ growth stage approach. Like the traditional
German historians, Rostow identified five growth stages in the transition from primitive to a
modern economy. These are:
 Stage 1: The traditional society, characterized by stagnant, subsistence agriculture and a
stratified society;
 Stage 2: The precondition for take-off, characterized by change through external forces,
infrastructure development, increasing exports, and a new social and political elite;
 Stage 3: The take-off, characterized by investment of greater than 10 per cent of GDP,
high growth manufacturing sectors, and institutional change favoring high growth;
 Stage 4: The drive-to-maturity, characterized by self-sustaining growth, the impact of
growth spreading to all areas, and decreasing social inequality;
 Stage 5: The high mass consumption, characterized by a shift in sectorial dominance to
durable consumer industries and growth of the service sector and welfare capitalism.
It was argued that developing countries were at stages one and two while developed countries
had passed stage three. The stages except the first and last, are transition stages rather than
equilibrium positions. Rostow was primarily concerned with the process by which a society
moves from one stage to another, and with the objective of providing policy guidance to the
leaders of the developing countries. Rostow's approach starts from the premise that deceleration
is the normal optimum path of a sector, due to a variety of factors operating on it, from the side
of both demand and supply. The problem of transition and hence of growth become how to offset
the tendency for slow progress in individual sectors to achieve growth in the total economy.
On the supply side, Rostow introduces the concept of sequence of leading sectors, which succeed
each other as the basic generators of growth. On the demand side, declining price and income
elasticities of demand are introduced as technical factors dampening the growth rate of leading
sectors and transforming them to sustaining or declining sectors. Technology plays an important
role in both the emergence of new leading sectors and the elimination of old sectors.
The above three growth stage theories (List, Marx and Rostow) so far reviewed treat the
transition from an agricultural to an industrial society as the major problem of development
policy. In an open economy, however, agriculture and primary sector industries may act as
leading sectors and carry the burden of accelerating growth. In addition, agriculture must provide
food for a rapidly increasing population, provide mass market, generate capital investment and
labor force for new leading sectors outside of agriculture.
3.1.2. Dual Economy Models
The dual economy models identify agriculture as the traditional sector and industry as the
modern sector and attempt to trace the relationship (or lack of relationship) between the two
sectors in the process of development. Broadly, the dual economy model can be categorized into
two major parts: static and dynamic dualism.
3.1.2.1. Static Dualism
There are two distinct variations within this model:
i) Sociological dualism, which stresses cultural differences leading to distinct Western
and non-Western concepts of economic organization and rationality.
ii) An enclave dualism, which emphasizes the improper (perverse) behavior of labor,
capital and product market through which the traditional and modern sectors interact.
3.1.2.2. Sociological Dualism
Boeke (1910) argued that Western economic thoughts were not applicable to tropical colonial
conditions and urged the need for a separate theoretical approach to the problems of such
economies. Where there is a sharp, deep, and broad cleavage dividing the society into two
segments, many social and economic issues take on a quite different appearance and western
economic theories lose their relation to reality and hence their value.
The major policy implication of Boeke analysis is the futility of attempting to introduce Western
technology and institutions to the Asian economic systems. Despite some criticisms (alleging
him in unfamiliarity with Western thought) he has got acceptance in the intellectual elite and the
bureaucracy in the economic policy and planning agencies. It provided an intellectual
rationalization for an industrialization policy that avoids investment in agricultural inputs
(fertilizer, chemicals, equipment) in favor of other heavy industry and import substitutes. Boek’s
backward bending supply curve provides a rationalization for failure to achieve productivity
gains in agriculture, in spite of: -
a) Failure to invest in agricultural research, education and manufactured input.
b) The adoption of price policies that provide only minimal incentives to use available
technology.
3.1.2.3. Enclave Dualism
Enclave dualism encompasses (encloses) a high productivity sector producing for export
coexisting with a low productivity sector producing for the domestic market. Higgins, explicitly
rejecting the sociological dualism, traces the origin of dualism to differences in technology
between the modern and subsistence sectors. In his view, the modern sector concentrates heavily
on the production of primary commodities in mining and plantations. It imports its technology
from abroad, which is basically laborsaving. This is in contrast to the technology employed in
the traditional sector, which is characterized by wide substitution possibilities between capital
and labor and the use of labor-intensive production methods. Expansion of the modern sector is
primarily in response to demand in foreign markets, and its growth has relatively little impact on
local economy.
3.1.2.4. Dynamic Dualism
This model is the work of Jorgenson, Fei and Ranis accepting the static typology of sociological’
and enclave dualism as essentially valid for a broad class of underdeveloped economies (Asia,
Africa and Latin America) with large indigenous populations.
According to them, these economies are characterized by the coexistence of two sectors: -
 A relatively large, stagnant and subsistence agricultural sector
 A relatively small but growing commercialized sector.
The main thrust of dynamic dual-economy models has been to explore the formal relationship
that would permit an escape from the Malthusian trap-the inevitable consequence of attempting
to introduce new technology into native agriculture, and from the lack of effective labor and
capital market relationships between the modern enclave and the traditional economy. Indeed
productivity increase in agriculture become, in the dynamic models, the mechanism that permits
continues reallocation of labor from the agricultural to the industrial sector.
In the model, the subsistence sector is characterized by:
1) Disguised unemployment and underemployment
2) Institutionally determined wage rate for agriculture
3) A marginal productivity of labor lower than the wage rate
4) Fixed land input
Under these conditions it is possible to transfer labor form the subsistence sector to the
commercial industrial sector without reducing agricultural output and without increasing the
supply price of labor to industrial sector during the early stages of development. Indeed, the
transfer of one worker from the subsistence to the non-subsistence sector results in an
agricultural surplus, which then becomes available as an investment fund for the development of
the industrial sector. The model also envisages additional agricultural surpluses as a result of
productivity increase from labor-intensive capital improvements.
Agriculture in this system, contributes both workers and surplus production in the form of a
wage fund for the expansion of the industrial sector.
 Given that: L1 is the labor shortage point
L2 is the labor commercialization point
Wi is the supply curve of labor
If agricultural labor force supply exceeds O2 L1, Marginal Productivity of Labor (MPL) of
agriculture will be is zero. If agricultural labor force supply exceeds O2 L2, MPL exceeds wage
rate. If the demand for labor in industrial sector exceeds O1L1, then transfer of labor from
agriculture to industry leads to decrease food output which then leads to increase food price and
consequently to increase wage rate in industrial sector.
Similarly, if the demand for labor in industrial sector tends to exceed the O1L2, wage rate in
agriculture and industry are rise together. Two points are important to discuss in relation to the
above results:
1. The Point when the Marginal Value Product (MVP) of agricultural labor begins to rise above
zero, shortage point, the transfer of one worker from subsistence to non-subsistence
(commercial-industry) sector doesn't releases a sufficiently large wage rate to support his
 consumption. The result is a worsening of the terms-of-trade (TOT) against the industrial
sector.
2. The point when the MVP of labor exceeds the wage rate in agricultural sector,
commercialization point, a rise in the industrial wage is required if the non-subsistence sector
is to compete effectively with the subsistence sector.
According to the Fei and Ranis model, the major functions of the public policy are:
 To design institutions that transfer the ownership of such surpluses from the agricultural
sector to the government or to the entrepreneurs in the commercial-industrial sector, and
 To avoid dissipation of potential surpluses through higher consumption in the rural
sector.
3.1.3. The Structuralism and Dependency Perspectives
The growth- stage approach looks largely within national economy for the timing of the
transition to more advanced stages. It also looks within the national economy for the
transformation of industrial structures. However, the dependency perspective insists that the key
to differential development between developed countries of the center and the underdeveloped
countries of the periphery is to be found in the growth of the international economic system in
the word system. The distinguishing feature of the dependency perspective is the dominance of
the economic forces operating in the international system over those operating within national
system. The different models are:
1. The structuralism model
2. The under development perspective
3. The agrarian development in the periphery.
3.1.3.1. The Structuralism Model
The central argument of the structuralize school is that the countries of the periphery have
experienced long-run deterioration in the terms-of-trade (TOT) with the center due to:
 Low price and income elasticity of demand in the center for the products of the
periphery
 High demand elasticity for imports from the center by the periphery
For example Productivity growth, measured in output per worker, is slower in primary
production (source of export by the periphery) than in the industrial sector (source of export by
the center). Similarly, the periphery sells its products in competitive market (homogeneous and
undifferentiated) while the center in monopolistic market (differentiated goods like consumer
durables and industrial equipment).
In the structuralisms view, the great industrial centers not only keep for themselves the benefits
of the use of new techniques in their own economy, but also are in a favorable position to obtain
a share of that deriving from the technical progress of the periphery. As a consequence of
differential demand elasticity’s and differential rates of productivity growth, the countries of the
periphery are forced into the unattractive alternative of growth strategy by restraining imports, by
tariff protection or subsidies to import substituting industries.
3.1.3.2. The Underdevelopment Perspective
The Orthodox Marxian theory assume that the force of technological change (the forces of
production) interacting with changes in institutions (the relations of production) and with culture
and ideology (the superstructure) cause economic growth in the advanced and backward
countries to converge along the common path. This is what is termed as the convergent growth
hypothesis, which states that developed countries show to the less developed countries the image
of their own future.
The perspectives insist that the underdevelopment of Africa, Asia and Latin America has been a
product of the same forces that have led to development in Europe and North America. The
integration of backward areas into the world capital system is viewed as a major source of
underdevelopment. So it appealed to nationalist sentiment because it focuses reform effort on
inequalities in the international system rather than on domestic policy.
3.1.3.3. Agrarian Development in the Periphery
Alain de Janvry has elaborated the implications of the dependency perspective for agrarian
development. In the de Janvry's view the implications of the dependency perspective for agrarian
development has been seen that rural poverty particularly in the Latin American context is
explained by a three lever chain of exploitive relations:
1. At the international level between the dominant countries of the center and the dependent
countries of the periphery, there had existed unequal exchange between raw materials and
industrial capital goods.
2. At the sector level between capital intensive industry and the labor intensive sector, the
former produces commodities for the upper class in the periphery and for the word
market, while the latter produces mass consumption with cheap labor; the type of cheap
 food for the laborers in commercial sector of agriculture, and which in turn produces
cheap food for the urban- industrial sector.
3. At the social level between landlords and agricultural laborers driven by the need for
cheap food and cheap labor in the urban sector.
The marginalization of peasants in the periphery is a consequence of the peculiar pattern of
dependent industrial development, i.e. wages and incomes remain low in rural areas because
capital-intensive industrial development creates little demand for labor, and labor-intensive
industrial development can expand only as long as wage rates remain low.
In the center, the distribution of income between capital and labor determines growth. The center
is the primary consumer of its own output, and wages are an important source of demand as well
as a cost of production. In the periphery low wages are an important determinant of the ability to
export labor-intensive primary and industrial products and to import capital equipment and
luxury consumer products.
The implication of dependency theory of agricultural development stands in sharp contrast to the
growth stage and dual economy theories in:
 The growth stage theories attempt to explain the process of transformation from a primary
agrarian to an industrial economy.
 In the dynamic dual economy models incorporation of peasants in to the market results in
the disappearance of dualism.
 The dependency perspective, however, attempts to explain why the periphery remained
trapped in a backward agrarian state. They view incorporation of rural areas in to the
market is the source of marginalization and it perpetuates rather than erodes dualism.
Chapter Summery
 In an economy that is primarily agricultural, the share of labor in agriculture will decline
slowly even when the growth of employment in the industrial and service sectors is very
rapid.
 The growth stage theories attempt to explain the process of transformation from a primary
agrarian to an industrial economy.
 In the dynamic dual economy models incorporation of peasants in to the market results in the
disappearance of dualism.
 The dependency perspective, however, attempts to explain why the periphery remained
trapped in a backward agrarian state.
 The class struggle reflects the continuing contradiction between the evolution of economic
institutions and progress in production technology.
 The distinguishing feature of the dependency perspective is the dominance of the economic
forces operating in the international system over those operating within national system.
Review Question
1. What is the relationship between agriculture and economic development?
2. What is the relationship between agriculture and growth in low-income countries?
3. The reason why agriculture and overall economic development of developing countries has
been stagnant for many decades?
4. Discuss the growth-stage development theories through the historical perspective?
5. Discuss the distinguishing feature of the dependency perspective is the dominance of the
economic forces operating in the international system?
 CHAPTER FOUR
4. AGRICULTURE AND STRUCTURAL TRANSFORMATION
4.1. INTRODUCTION
Agriculture is an important segment of traditional economy, the transformation from feudalism
to capitalism necessarily implies a transformation of agriculture. To achieve the transformation
of agriculture it is important different experiences or models practiced by different professional
in different countries.
Agricultural transformation is the process by which an agro-food system transforms over time
from being subsistence-oriented and farm-centered into one that is more commercialized,
productive, and off-farm centered. Agriculture contributes to development as an economic
activity, as a livelihood, and as a provider of environmental services, making the sector a unique
instrument for development. The patterns of structural transformation have been observed
historically in most developed countries and are currently taking place in developing countries
that experience growth. But there are noteworthy deviations.
Structural transformation as a distinctive feature of economic growth that occurs when a
sustained period of rising income and living standards coincides with changes in the distribution
of economic activity across three broad sectors of an economy agriculture, industry, and services.
Economic development is a process of structural transformation, and agriculture is the essential
engine to jumpstart the process. Ending hunger and undernutrition are also important goals of
agricultural modernization and for economic transformation.
The theory of agricultural development should provide insight into the dynamics of agricultural
growth (changing sources of growth) in economies whose output growth from an annual rate of
1.0 percent or less to 4.0 percent or more. Making the farming systems of the rural poor less
vulnerable to climate change is imperative. Managing the connections among agriculture, natural
resource conservation, and the environment must be an integral part of using agriculture for
development. The way agriculture works for development varies across countries depending on
how they rely on agriculture as a source of growth and an instrument for poverty reduction.
 4.1.1. Structural Transformation
What are structural transformations?
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
Structural transformation is defined as the transition of an economy from low productivity and
labor-intensive economic activities to higher productivity and skill intensive activities. The
transformation of the ownership structure of the agricultural sector is a precondition for its
marketization and cooperation with sectors that supply agricultural inputs and process
agricultural output.
The net effect of the dynamic interaction between the agricultural and non-agricultural sectors in
a developing economy is the complete transformation of the agricultural sector. All major
economies of the world, even the richest, started out as primarily agrarian economies. Over time,
economic development has stimulated a process of structural transformation during which broad-
based productivity growth accompanied a shifting sectorial composition of economic activity.
There is widespread agreement that the share of agriculture will fall during this transformation
and that transfers of capital and labor from agriculture help fuel growth in the expanding
industrial and service sectors of developing economies.
Economic transformation is visualized as an interrelated set of long-run processes of structural
changes that accompany growth. The concepts of structural change used in economics are put
into five main aspects listed below. These interrelated processes of structural change
accompanying economic development are jointly referred to as structural transformation.
1. Increase in the rate of physical and human capital accumulation
2. Shift in sectorial composition of economic activity (industrialization)
a. Production, demand, trade, and factor use
b. The allocation of employment
3. Change in location of economic activity (urbanization)
4. Changes in other associated aspects of industrialization (demographic transition, income
distribution)
5. Change in institutions.
The accumulation of physical and human capital and shifts in the composition of demand, trade,
production, and employment are described as the economic core of the transformation, while the
related socio-economic processes are identified as peripheral. The decline in the share of
agriculture is accompanied by progress in science and technology. As agricultural transformation
the process of converting household-oriented, subsistence type structures to commercial units
that have highly efficient linkages to the urban and world economies three major events take
place.
These events explain why the role of agriculture declines as structural transformation takes place.
1. Specialization (social division of labor): new sectors emerge as a result of the progress
in science and technology. With the emergence of new sectors, the share of agriculture
declines. Compare farmers in developing countries who are engaged in farming, taking
their products to market, building their houses, etc. to farmers in the developed countries
who are engaged in farming only (houses being built by construction sector, marketing
done through ago-businesses, etc.).
2. Engle’s law: as income grows following an improvement in science and technology, the
structure and composition of the demand for food changes. The income elasticity of
demand for food declines with a rise in income as individuals switch their additional
income away from food. Besides, the demand for food shifts in favor of manufactured
food items. Thus, the share of agriculture declines.
3. Movement in commodity terms of trade against agricultural sector: progress in
agricultural science and technology increases productivity, which in turn, reduces the unit
cost of production and thereby exerts a downward pressure on the prices of food
products. Or at least, the prices of agricultural commodities grow at a slower rate than the
prices of non-agricultural products.
Note that it is not possible to make agriculture’s share decline unless agriculture is first made to
grow rapidly make investments in agriculture. If a country is poor to start with, it cannot make
the economy grow rapidly unless it builds an agricultural base. With respect to sectorial shift in
the composition of the labor force within structural transformation, the agricultural sector
releases labor to the expanding urban sectors.
The total agricultural labor force of a particular developing country may take the path depicted in
the figure below.
 Total Turning
Agricu Point
ltural
Labou
r
Force
(Absol
ute

The speed at which the process of structural transformation attains its turning point the rate of
structural transformation (RST) could be calculated as: Years
LN
RST = [l N −l T ]
LT

Where
LT is the total labor force (agricultural + non-agricultural),

L N is the non-agricultural labor force

LN
LT is the (initial) share of the non-agricultural labor force.

l N is the rate of growth of the non-agricultural labor force,

l T is the rate of growth of the total labor force, and

l N −l T is the differential rate of growth.

A country with a higher RST is moving faster towards the turning point than a country with a
lower RST. That is, a country with a higher value of RST needs a lesser number of years to reach
the turning point in the process than the one with lower RST, ceteris paribus. This fast moving
country could be the one with a lower initial share of its labor in the agricultural sector, or a
higher growth rate of its labor in the non-agricultural sector, or a lower growth rate of the total
labor force, or more sensibly combinations of these. Sub-Saharan African countries are generally
LN
characterized by a very high initial share of its labor in the agricultural sector (low LT ), a very
l
low growth rate of its labor in the non-agricultural sector (low N ), and a very high growth rate of
 l
the total labor force (high T ). Thus, the RST for Sub-Saharan Africa is either a negative or a
small positive value.
Generally, successful agricultural transformations have focused on the farming household,
providing opportunities for farmers to earn a better income. For some, that will mean raising
farm productivity or shifting the mix of production to include higher-value crops and livestock.
For others, the right choice will be to do less farming and take advantage of employment options
off the farm. As farmers have more money in their pockets, they spend more in the local
economy, creating jobs, opportunity, and more demand for agricultural goods. The question is
how for that; a well-crafted agricultural plan is required as part of a country’s overall economic
development approach. There are six elements that distinguish a superior agricultural plan.
1. Prioritized and Differentiated Strategies
Developing an agricultural transformation plan demands prioritization—a plan will not succeed
if it tries to cover everything. Instead, it should focus on the changes that are most likely to kick-
start rural economic growth. Successful plans identify goals in a limited number of crop and
livestock value chains, cross-cutting agriculture sector enablers (such as lower transportation
costs or access to irrigation), and specific geographies. to accelerate, sustain, and scale these
growth cycles.
2. Market-Driven Opportunities For Farmers
Agricultural transformations often focus too much on volume rather than value and on
productivity of row crops rather than opportunities for high-value crops, downstream processing,
and livestock. Farmers everywhere are businesspeople. Farming households in developing
countries balance a portfolio of crops, livestock, and nonfarm work. Because they feed their
families with some of the farm output as well as sell into markets, they make decisions based on
their potential profit, risk, and cash flow across family food consumption as well as sales. Too
often, agricultural plans recommend particular commodities without paying attention to this
basic calculus of farmer household economics. Successful agricultural transformation plans give
farmers the opportunity to raise their household incomes.
3. Change agents identified and mobilized
The success of any agricultural transformation relies on how well millions of smallholders and
small- and medium-size enterprises can be helped to change farming practices as quickly and
effectively as possible. The critical enabler, without which an agricultural transformation is
likely to fail, is a frontline “change agent” that helps farmers modify their practices. Change
agents are people who farmers trust and interact with regularly. The high-level objectives of a
transformation are realized in practice only when they are effectively translated to smaller, on-
farm shifts. For example, increased productivity in the dairy sector might be achieved through
farmers accessing better animal health technologies and better cattle breeds or joining dairy
cooperatives to sell their milk. Change agents provide the critical interface with farmers. To
catalyze this, a change agent might be the person providing extension knowledge, offering
financing for farming inputs such as fertilizer, aggregating crops, or facilitating marketing
services. For example, a change agent can help farmers make the transition from growing wheat
to more complicated but lucrative opportunities such as raising tomatoes, vegetables, and orchard
crops.
4. Finding the right starting points for scale
Change in agricultural systems requires multiple parallel advancements. For example,
improvements in agricultural extension and seed systems might enable farmers to switch to a
more productive hybrid seed, but lack of access to fertilizer (upon which the hybrid depends)
could prevent productivity increases and leave the farmer unwilling to buy hybrid seed next time.
As in any complex economic system, when so many elements are interrelated, any one of them
can become a constraint and stall progress.
A common reaction to this interdependency problem is to try to move all elements ahead in a
highly prescribed way, specifying interventions up and down value chains and creating complex
plans with a high potential for failure. Instead, the best agricultural transformation plans have
two critical characteristics: they anticipate the need for agility, and they selectively focus on the
points of the system where small changes are likely to cause larger shifts. These focus areas
could be within specific geographies or within particularly influential value chains.
5. Pragmatic Approach With An Investor Mind-Set
Approaching transformations with an investor mind-set is critical to the success of the process.
In kick-starting agricultural transformations, coordination among government, donors, and civil
society is critical, but it is equally important from the start to plan for private-sector engagement.
Without this, the transformation may proceed more slowly, stall, or not reach scale.
Agricultural transformation plans with an investor mind-set include three strategic planning
components.
  First, the plan identifies public investments that complement likely private-sector
investment. These are investments in areas where returns are low and/or risks are high.
They can include typical public goods (such as rural advisory services or training) as well
as investments in commodities or geographies that are important to transformation but
unlikely to garner private investment.
 Second, a good agricultural transformation plan identifies public investments designed to
catalyze additional private-sector engagement. This may be, for example, through risk
guarantees, cost sharing, innovative public–private partnerships, targeted subsidies, or
provision of infrastructure conditional on private investment.
 Last, agricultural transformation plans with an investor mind-set anticipate changes in the
enabling environment that will be necessary as the transformation progresses to support
increasing private-sector engagement. These policies, laws, and regulations are usually
across multiple sectors in addition to agriculture, including banking, trade, and land
policies.
6. Progress on enabling policies
Agricultural transformation is more than changes in farming practices. It is about catalyzing
transformation of a country’s rural economy. As such, more than agricultural trade and subsidy
policies are in play. For example, laws and regulations that influence banking, labor,
infrastructure, land ownership and access, access to water, telecommunications, taxes, and
insurance are also critical considerations.
Land policy is often cited as a pivotal factor in determining whether a country’s agricultural
transformation can simultaneously achieve sustained progress and inclusivity (contributing to
widespread poverty reduction). Land policy is a good illustration of how critical it is for policies
to be dynamic—changing over time to prevent transformations from stalling. For example, land
ownership or tenure may be key at the start of an agricultural transformation as a way of
influencing farmers’ investment in their production. However, rental markets may soon become
important as some farmers move out of agriculture into other jobs and need income from their
land.
4.1.2. Some Country Experiences in Agricultural Transformation
Agriculture is critical to developing countries, both economically and in its potential to improve
people's lives. People who work in agriculture in developing countries typically do so as
independent small-scale farmers or pastoralists who depend on the food they can produce on
their own. Ethiopia has great agricultural potential because of its vast areas of fertile land,
diverse climate, generally adequate rainfall, and large labor pool.
Despite this potential, however, Ethiopian agriculture has remained underdeveloped. It is easy to
tell a story of why agricultural growth is a necessary condition for a country’s economic
development in the poorest areas of the world. The share of the population in agriculture, as well
as the share of food in consumption is so high that income generation, or new income streams
have to come from agriculture if they are to make any substantial national impact. Yet, it appears
that some countries have managed to grow without a flourishing agricultural sector.
he most effective way to improve the lives of millions in poverty is to support agriculture in
developing countries. Most of the world’s poor are farmers, and those who are not spend much
of their income on food. Transforming a country’s agriculture sector can create jobs, raise
incomes, reduce malnutrition, and kick-start the economy on a path to middle-income growth. In
fact, almost every industrialized nation began its economic ascent with an agricultural
transformation. Recent examples include Brazil, China, and Vietnam, each of which at least
doubled the value of its agriculture sector within 20 years of starting its transformation. Many
other countries in Africa, Asia, and Latin America are earlier on the path of transformation.
or some, agricultural transformation has not advanced as planned or has stalled. Navigating the
complexity of a transformation is invariably tough for governments, even though they may
prioritize agricultural investment and recognize how important it is to get right. This is especially
true in an era in which governments are seeking agricultural transformations that meet multiple
goals simultaneously. In addition to traditional economic development and poverty reduction
goals, governments are also focusing their agricultural transformation plans on Sustainable
Development Goals (SDGs) by considering, for example, climate-smart strategies, women’s
economic empowerment, and biodiversity.
The drivers of agricultural transformation are multidimensional, interrelated, and change over
time, but they can be organized into categories to provide a better opportunity for pragmatic
diagnostics and decision making on national priorities. After running more than 30 country
diagnostics, we found that the drivers fall into three main categories.
  First, there are elements of “transformation readiness.” Changes to a country’s
institutional framework, governing mechanisms, and political environment can
significantly influence the likelihood of accelerating an agricultural transformation.
 Second, the quality of the national agricultural plan or strategy is critical.
 Last, there are drivers related to delivery mechanisms. This category focuses on what is
needed to translate the national agricultural plan into on-the-ground impact. This includes
the ways in which countries manage decision making and progress against targets as well
as how they use change agents to support the large-scale behavior change among
smallholder farmers that underpins a successful agricultural transformation.
To test the hypothesis that agricultural growth is necessary for general economic growth, it is
better to look in detail at each country and inquire whether the behavior of variables over time is
consistent with the hypothesis under consideration rather than looking at the significance of
estimated parameters in cross-country regressions. This chapter considers both polar claims with
respect to agriculture’s role in economic development in this light. To this end, we shall briefly
adopt five country cases: England, USA, Japan, Taiwan, and Argentina.
1. England
England was the first country to industrialize, and agriculture had a well-documented role in the
process. There is consensus among economic historians that the British agricultural revolution
stretched out over the span of a century or more, and its core was an increase in cereal yields per
acre (that is, the amount of grain that could be produced from a given area of land sown with a
particular crop).
Agriculture’s contribution to GDP, estimated at around 43% in 1700, declined to 10% by the
1880s. Roughly 75% of the English population was dependent on agriculture in 1700. But by the
late 19th century, the urban population predominated. The industrial revolution, characterized by
the increasing application of power-driven machinery (instead of human labor) to manufacturing,
started in the mid-18th century and continued into the 19th century.
From around 1770s to 1840s, while money wages went up, real agricultural wages declined with
sharp and sustained rises in wheat prices. The main factors pushing prices up were the
unprecedented rise in population, especially the increasing non-agricultural population (64% of
total by 1801), the Napoleonic Wars (1793–1815), and the continued protection afforded by the
Corn Laws (1815–1846).
By the 1850s, small farms were a minority. There was increased agricultural investment, which
gradually included the purchase of industrially manufactured farm implements. The expansion of
export and re-export trades generated wealth that was reinvested in land by the successful
merchant class. Thus, by the early 19th century, a virtuous circle of agricultural and industrial
integration and expansion had set in.
The quantity of food exported from agriculture to the urban sector increased by 265% from 1701
to 1820. The industrial revolution proceeded without a large increase in the import of food and
raw materials. Thanks to the agricultural revolution, neither the Malthusian fears over excess
population nor the Ricardian concerns over diminishing returns materialized to choke off the
industrial revolution. Emigration to America might have also helped overcome these problems
related to population growth.
Thus, the polar view that industrial expansion can bypass agricultural development gets no
support from England’s industrializing experience and in the view of economic historians could
not have succeeded without agriculture’s contribution.
2. USA
A common view among historians describes “eighteenth and early nineteenth century farmers in
‘New England’ as trapped by poor husbandry in persistently low-yield, subsistence agriculture.
Agriculture is implausible as an engine of economic transformation until later in the 19th
century. The deliberate elimination of the Red Indians created an opportunity for the evolution of
an agriculture based on an abundance of land and a relative scarcity of labor. In addition to the
use of slave labor, the scarcity of labor stimulated the development of an agricultural technology
that was primarily directed towards achieving gains in labor productivity rather than gains in
land productivity.
Dividing 1800–2000 into four fifty-year periods, the rate of growth of real GDP per person was
0.7% annually during 1800–1850, and 1.7%, 2.0%, and 2.2% during the succeeding three
periods. The growth rate almost tripled during 1850–2000 as compared to 1800–1850. Both the
transformation of agriculture and the acceleration of overall economic growth came after 1850.
The period after the Civil War (1861–1865) was when both accelerated GDP growth and a sharp
increase in the non-farm share of the United States population were seen. What was the
contribution of agriculture?
In explaining the acceleration of economic growth, the causal factors that attract the most
attention are matters of technology and large scale investment: e.g., canals, exemplified by the
opening of the Erie Canal in the 1830s; the latter development of railroads culminating in the
transcontinental railway completed in the 1870s; and a series of industrial innovations that,
financed by venture capitalists and banks unrestrained by regulations, created great industries in
steel, shipping, machinery and building materials. The building of this modern transport
infrastructure was pivotal in expanding agricultural markets and raising prices. This view
emphasizes the critical importance of modern transport and communications infrastructure and
access to expanding markets for the development of both industry and agriculture.
An estimation of the 19th century growth in US agriculture shows that the inputs of land, labor,
and capital all grew at an annual rate of about 2% over the whole period 1800–1900, but
relatively faster at almost 3% annually for all three input categories during 1800–1840. However,
total factor productivity (TFP) growth was much slower: 0.2% annually in 1800–1840, 0.56% in
1840–1880, and 0.15% in 1880–1900.
The increases in inputs helped in the growth of aggregate output, but productivity growth at the
rates cited indicates only a modest contribution to output per capita since the increases in output
did not do much more than pay for the additional inputs. These estimates provide the basis for a
quantitative assessment of agriculture’s place in the overall picture. As such, agriculture’s role is
positive but modest. The contribution is argued to be far from sufficient to explain the nation’s
economic transformation.
By 1880, non-agricultural employment exceeded agricultural employment. By 1929,
manufacturing employment alone exceeded agricultural employment. By 1970, agricultural
employment was less than total unemployment in the United States. Indeed, although agriculture
grew in the 19th century and was home to some notable innovations, it can be argued that the
successful transformation of American agriculture in terms of sustained productivity growth did
not occur until the earlier part of the 20 th century. Nevertheless, agriculture did contribute to
America’s overall economic transformation, e.g., through total factor productivity growth and in
terms of export earnings and increased urban food supply.
Which of the polar views does the U.S. case support or undermine?
Based on estimates of total factor productivity growth, agriculture’s role as a causal factor during
the early stages of America’s industrial transformation in the 19th century is judged to be
significant but not crucial. Thus, the U.S. case refutes the polar view that agriculture is necessary
for sustained industrial growth. While not a confirming instance of the anti-agriculture view, the
U.S. experience is consistent with it. The U.S. industrialization both benefited from and
contributed to the successful transformation of its agriculture. It was a two-way synergistic
interaction, not fundamentally causal in either direction.
3. Japan
Japan was the first Asian country to succeed in bringing about a striking transformation in the
productivity of its agriculture. In contrast to the United States, agricultural development in Japan
occurred within a framework of increasing labor intensity. The average size of the Japanese farm
was approximately 1 hectare (2.2 acres) in 1878 and 0.8 hectare (1.7 acres) in 1962.
In many respects, the Japanese experience was the outcome of factors peculiar to the Japanese
environment. Japan is an island economy, and social institutions had been cultivated and refined
over generations to permit an efficient balance between population and a limited resource base.
Despite other differences, at the time of the takeoff, Japanese agricultural development was
similar in many respects to that of other countries in Asia a traditional agriculture characterized
by small scale subsistence farms dominated by a hierarchical social structure. The level of
productivity in Japanese agriculture prior to the Meiji Restoration (1868), as measured by yields
per hectare or per person, were probably only slightly higher than the levels of productivity that
persist today throughout the rest of Asia.
The remarkable feature of the Japanese agricultural transformation, and the feature that makes it
of special interest in the rest of Asia today, is that it took place within a traditional framework of
small scale agriculture. Although the average farm was declining in size, the average rice yield
rose from 1.8 metric tons per hectare (1868 to 1882) to 4.0 metric tons in the late 1950s and 5.8
metric tons in the mid-1970s.
During this development, Japanese agriculture went through 4 phases:
1. A period of rapid growth lasting from approximately the time of the Meiji Restoration
(1868) until the end of World War I.
2. A period of slower growth lasting from the end of World War I through World War II.
3. A new period of rapid growth, starting almost immediately after the end of World War II
and continuing to the mid-1960s.
4. A period of slower growth since the mid-1960s.
The rapid increase in Japanese agricultural productivity between 1870 and 1920 was due to the
diffusion of the superior practices already in use in Japanese traditional agriculture combined
with the limited adoption of Western methods, primarily soil and fertilizer science adopted from
Germany.
The Japanese officials, who visited the West and returned to Japan, stressed the need for raising
the level of Japanese agriculture to that of the West by adopting western-style extensive farming
in place of small-scale intensive farming. It became apparent, however, that instead of the large-
scale farm-management techniques developed in North America and England, the knowledge
and techniques of Germany, particularly the new knowledge of soils and fertilizers, would
become more realistic and practical in application to the small-scale Japanese agriculture.
The practice of western-style based extensive farming was very limited. In 1887, a new
agricultural policy was adopted that shifted emphasis away from introducing western farming
methods to strengthening traditional farming methods. There were three major elements in this
new policy:
i. Selection and diffusion of high-yielding cultivars of rice,
ii. The establishment of a fertilizer-consuming agriculture, and
iii. Introduction and diffusion of new cultural practices and implements.
These three policies were closely interrelated. The new rice cultivars selected were those that
responded well to nitrogen fertilizer. Such cultural practices as deep plowing, double cropping,
straight-row planting, revision of field layouts, irrigation and drainage, and others were also
oriented toward obtaining a favorable response from increased fertilization.
These policies were effective for several reasons. Over the preceding 300 years, agricultural
techniques had been slowly improving, but the restraints of the feudal system had suppressed the
diffusion of new techniques. Under the feudal system, peasants were bound to their land and not
allowed to leave their villages except for religious pilgrimages. Nor were they free to choose
which crops to plant or which cultivars to sow, the feudal lords were restless to raise agricultural
productivity in their own territories, but they frequently prohibited the transfer of techniques or
cultivars outside their bounds. It is even recorded that one village placed a guard at its border to
prevent a variety of seed selected in the village from being taken out.
A second factor in the success of the Meiji agricultural policy was the pattern of investment in
agricultural education by the government. Agricultural schools were organized as early as 1876.
An agricultural experiment station and seed breeding station was established in 1877. By 1900,
Japan had developed a number of national research institutions as well as a network of
experiment stations at the prefectural (a small administrative unit) level.
Initially, the most successful "veteran farmers" were used to carry improved techniques to other
farmers in their own and in other prefectures. By 1893, the prefectural experiment stations were
given responsibility for formal extension activity. Thus the prefectural experiment stations
became extension centers for the dissemination of new knowledge to associations of village
farmers. Failure to adopt improved technologies was frequently punished by fines or arrest. This
obviously created a somewhat different level of receptivity than the county agents in the United
States faced when they began their work in 1914.
Shortly after World War I, Japan appeared to have reached the limit of agricultural development
that could be attained by using traditional methods. The rate of growth of agricultural output
declined. Food shortages developed in the face of a growing urban population. Whereas
agriculture had been a major source of support for Japan's industrial revolution during the Meiji
era, it now became a depressed area in the economy. The land-tenure system placed increased
burdens on the tenants and dampened incentives to produce.
A number of significant changes took place during this period. Agricultural land development
was pushed into marginal areas. Farmers began to shift their production away from rice into the
even more labor-intensive livestock production, silkworm raising (sericulture), and fruit and
vegetable production. The shift away from rice was partly in response to the lowering of prices
that resulted from the importation of rice from Formosa (Taiwan) and Korea.
The rapid shift of farm workers from agricultural to non-agricultural employment during the
period was not sufficient to reduce the size of the agricultural labor force. Farm employment did
decline, however, from roughly 40% of the labor force at the beginning of the period to less than
20% by the beginning of World War II.
By the beginning of World War II, Japanese agriculture was again beginning to experience rapid
economic growth. During the war, however, agriculture suffered from shortages of labor and
materials. Availability of commercial fertilizer dropped sharply. The yield of rice fell in 1945 to
only about 70% of the prewar level. Following World War II Japanese agriculture experienced a
new burst of productivity. Two factors appeared to have been particularly important.
i. The increased incentive to produce, which resulted from the land reform of 1947-1950.
 ii. The backlog/accumulation of modern technology resulting from the increased
sophistication of experiment-station research and the increased industrial capacity that
emerged from World War II.
The postwar land reform represented the culmination of land improvement that began during the
Meiji restoration rather than any sharp break with the past. All farmland owned by absentee
landlords and all farmland leased by resident landlords in excess of four hectares was
appropriated by the government and sold to the actual tenants. About two million hectares,
approximately 80% of the tenant-cultivated land, was acquired by tenant farmers. The result was
a major improvement in incentives to adopt new technology and increase production.
The change in agricultural technology since World War II can be illustrated by the following.
The new rice cultivars being planted in Japan today are the result of experiment station breeding
programs designed to produce high yielding, disease resistant varieties that respond well to
fertilization. This is in contrast to the basis of selection that prevailed during the Meiji period,
when the best cultivars were selected from the many already in existence. The new breeding
programs, however, did not depart in their objective from that of the older selection programs.
The varietal improvements and associated cultural practices continued to be directed toward the
development of a fertilizer consuming rice culture.
The increased capacity of Japanese industry to produce fertilizers and other agricultural
chemicals has complemented this traditional objective. There has, however, been one major
change. As a result of Japan's continued rapid industrial development, the agricultural labor force
began to decline in the 1950s.
Agricultural wage rates have risen. Small scale mechanization, including the use of power
sprayers and dusters and the use of electric motors and internal combustion engines for threshing
and pumping irrigation water, has expanded rapidly. Most striking of all has been the rapid small
scale mechanization of plowing and other field operations. The use of mechanized equipment for
field operations was insignificant before World War II, but by 1960 there were half a million
small tractors or cultivators in use. By the 1970s, this small scale equipment was being replaced
by larger land preparation and tillage equipment.
A major problem of structural reform in Japanese agriculture is how to increase the size of the
farm operating unit in an equitable manner. Programs of assistance for land consolidation and
cooperative use of farm equipment have been implemented. The Farmers' Pension Fund is
authorized to purchase agricultural land from older farmers and sell it to farmers who want to
enlarge their farms. The fund can also assist in financing the purchase of land from retiring
farmers.
This history of Japanese agricultural development illustrates how the agricultural sector of the
economy was able to fulfill its traditional role in the strategy of overall development. Japanese
agriculture, in the course of its transformation, was able to earn foreign exchange, to provide
savings and investment for a developing urban industrial sector, and to supply raw materials and
foodstuffs for the rest of the economy.
Most significant of all, this was achieved within a system of small scale, labor intensive farming
made possible by placing greater emphasis upon the biological revolution than upon the
"mechanical revolution." In the next several decades, as the Japanese agricultural labor force
declines, it seems likely that Japanese agriculture will successfully complement the biological
revolution of the last 100 years with a mechanical revolution, leading to a fully modern system
of agriculture. The Japanese example, with its initial stress on the biological revolution,
represents a more valid model for many of the developing economies than the United States
model.
4. Taiwan
Taiwan's agricultural development can be divided into two distinct periods: the colonial years
from 1895 to 1945 and the postwar years from 1945 on.
The Colonial Period, 1895-1945
During the colonial period from 1895 to 1945, Taiwan was under the rule of Japan and became
an important part of its agricultural sector. The principal goal of the colonial government was to
make Taiwan's subsistence agriculture more productive so that large supplies of food could be
exported to Japan to support its industrialization effort. The fact that agricultural output,
particularly food, was not limited by domestic demand is important in understanding Taiwan’s
development process.
In the 50 years of Japanese occupation, agriculture accounted for about 40 to 45 percent of
Taiwan's net domestic product (NDP) and about 65 to 70 percent of the total labor force. In the
period from 1913 to 1921, the average annual growth rate of total agricultural production was 2
percent, and that of gross value added was only 1.4 percent. The main factor contributing to the
increase was the expansion of cultivated land area. The yield of rice and sugarcane did not
increase significantly. Labor inputs measured in terms of total working days increased
moderately as a result of a rise in the number of average working days per worker per year.
Production techniques were labor-intensive and relied on farm-produced fertilizer.
From 1921 to 1936, a period of agricultural transformation, total production increased at an
annual rate of 4.2 percent and agricultural output at the rate of 4.3 percent. Crop yields and
multiple cropping also increased, as did the land under cultivation. Improved varieties of crops
and the use of chemical fertilizers helped raise crop yields significantly. In addition, the area of
irrigated land increased, and the irrigated portion of cultivated land rose from 48.4 to 61.6
percent. The rapid adoption of high-yielding ponlai rice from Japan and new farming techniques
greatly contributed to these increases. Livestock production also rose significantly in this period.
Taiwan's success in applying new agricultural technology was due to the efforts of rural
institutions, particularly agricultural research stations, farmers' associations, and rural credit and
extension services. In the mid-1920s experimental stations developed improved seeds and
modern inputs as part of a labor-intensive package and made them available to farmers. This
activity explains the sharp increase in labor productivity, growth, and employment up to the
beginning of World War II. The experimental stations continued to play a significant role in the
postwar restructuring.
During the war, agriculture suffered a serious decline. Production decreased by 36 percent from
1937 to 1946 as a result of both typhoon and war damage. Per hectare yields dropped 30 percent
as both crop area and cultivated land decreased slightly. And livestock production fell an average
of 7.8 percent per year. Despite the transformation of agriculture in the colonial period, Taiwan
was still a predominantly agricultural economy at this time. At the end of World War II about
two-thirds of its labor force was employed in agriculture, but the sector generated only about 40
percent of NDP. It was not yet possible to convert rapid agricultural growth into nonagricultural
growth because agricultural development had been geared to providing a surplus for export to
Japan.
4.2. Agricultural Development in the Postwar Period
The end of World War II produced a technological boom in agricultural machinery and research.
Ironically, this boom in research spending and emphasis did not produce a revolution in
technology. Instead, the boom refined and expanded on many of the discoveries that had been
made before and during the war. The War also encouraged modernization on farms, which drove
productivity as farms adopted new machinery and methods.
Agricultural development is described as the process of creating the circumstances for
agricultural potential to be realized. The accumulation of knowledge and the availability of
technology, as well as the allocation of inputs and outputs, are among these conditions. Taiwan's
economy was in disarray when it was returned to the Republic of China in 1945. Agricultural
production in that year was less than half the prewar peak, and industrial output less than one-
third. The situation continued to deteriorate in the immediate postwar years, which were marked
by high inflation, grave shortages of food and other necessities, a heavy defense burden, and a
large influx of people from the mainland as a result of the social and political instability there.
The government therefore gave the highest priority to economic stabilization, food production,
and the repair of war damage. To alleviate the intense population pressure on limited land, it
decided to grant incentives to farmers. The most effective incentive was the land reform program
implemented between 1949 and 1953, which helped improve both agricultural production and
farmers' income. In addition, war-damaged irrigation and drainage facilities were repaired,
supplies of fertilizers and other farm inputs made available, and farmers' organization
strengthened.
During the runaway inflation in the immediate postwar years, food prices in relation to general
prices rose quickly. With high farm prices and a steady supply of inputs, agricultural production
increased 19.2 percent annually between 1946 and 1950, and by 1951 output surpassed the
prewar peak. Three groups of factors contributed to the rapid agricultural recovery and
rehabilitation during the 1946-50 period:
i. A rapid increase in labor input, crop area, and multiple-crop diversification;
ii. The introduction of better production techniques, rehabilitation of irrigation facilities,
and reorganization of farmers' associations; and
iii. The implementation of a land-rent reduction program in 1949 that induced tenant
farmers to increase production.
Total agricultural production grew 4.3 percent annually from 1950 to 1988, but the rate of
increase declined sharply. In the 1980s crop production fluctuated with no growth, mainly
because of the declining returns on crops and the government program to reduce the rice
production in the wake of a drastic decline in consumption per capita. A comparison of the
production data for 1970 to 1988 clearly indicates that all major crops were being produced in
smaller amounts except sugarcane, corn, and citrus. The liberalization of corn and soybean
imports and depressed international price for most agricultural products, particularly sugar, had
put great pressure on domestic farmers, even for corn and sugarcane growers.
Forestry production has shown a similar trend since 1970, when national forestry policy changed
its emphasis from cutting timber to preservation. Livestock and fishery made up the loss from
crops in total agricultural production. Stimulated by a rising demand in domestic and foreign
markets, products in these sectors grew 7.6 and 7.8 percent per year from 1950 to 1988,
respectively. On one hand, the increased use of feed grains on large farms improved the
efficiency and profitability of Taiwan's hog industry, and on the other, deep-sea fishing along
with fish culture expanded fishery production. Nevertheless, both industries began having a
difficult time in the 1980s because of environmental concerns, rising labor costs, and worldwide
restrictions on fishing in coastal waters.
The Cultivated area remained fairly constant during 1952-82. The number of agricultural
workers and man-days of agricultural labor rose until about 1965 and then started falling. The
number of draft cattle reached a peak in 1958 but fell substantially thereafter. The consumption
of chemical fertilizer rose steadily. The decline in inputs of the late 1960s was a reflection of the
increasing use of mechanical energy in place of human and animal energy.
From 1952 to 1960 capital productivity increased only 13 percent; it more than doubled during
1960-70 and then declined by 27 percent during 1970-80. Land and labor productivity continued
to rise rapidly in the early stage of agricultural development in Taiwan, when land resources
were limited and farm labor was abundant, since the increase in capital investment could raise
both land and labor productivity, particularly the former.
In 1960-70 and thereafter, the rapidly growing industrial sector absorbed a great deal of farm
labor, which helped improve labor productivity further. Consequently, the annual growth of
labor productivity (5.7 percent) exceeded that of land productivity (4.9 percent). In the same
period, capital productivity grew only slightly and from 1970 to 1982 exhibited negative growth
because capital investment was constrained by the limited land area and farm labor.
The second half of the 1960s can be considered the turning point of Taiwan's agricultural
development. Several institutions contributed to this rapid development, particularly the Sino-
American Joint Commission on Rural Reconstruction (JCRR). Its agents worked with the
government and various organizations in identifying problems and developing policy
recommendations, and in providing technical and financial assistance. By merging planning and
implementation and striving for "integrated rural development," the JCRR helped generate a
spirit of self-help among local agencies.
The land reforms of 1949-53 produced further changes. Immediately after the war, most
Taiwanese farmers were tenants and received less than half of their crop harvests. Under the land
reform program, rents were reduced, public lands were sold off, and land was given to the tillers.
These measures redistributed assets, provided incentives for land improvement, raised the social
status of farmers, released land capital for nonagricultural purposes, and helped create small and
medium enterprises.
In short, the land reform program supplied an indispensable social infrastructure for the
successful development of the agricultural and industrial sectors. Last but not least, research
institutes and associations in Taiwan introduced, developed, and diffused agricultural
technologies. Farmers' and fishermen's associations also engaged in market promotion and
provided financial services to their members. These associations helped implement government
policies.
From the outset, the authorities recognized the need for new technologies and modern farm
inputs and hastened to establish a number of agricultural research institutes in Taiwan at different
levels. As a result of the efforts of these institutes, Taiwan has successfully produced hybrid
hogs, reduced the incidence of livestock disease, and developed many high-yielding varieties of
rice, sugarcane, corn, and sweet potatoes.
The successful breeding of fast-maturing varieties crops contributed to Taiwan's multiple-
cropping system and gained worldwide attention in the early stages of its development. To
facilitate the spread of these new technologies, experimental results are made known to farmers
through demonstrations conducted by the district agricultural improvement stations and by the
extension network of farmers' associations.
In the 1950s the republican government began to improve and expand the infrastructure that had
already been built by the Japanese. In preparation for economic development, Taiwan invested
large amounts in irrigation, land development, road construction, communication, and the
electric power industry. It continued the expansion and modernization of paved roads,
communications, and postal establishments into the 1980s. In addition, it modernized and
improved the efficiency of its railways.
Greater economic stability in the 1950s facilitated agricultural and industrial development. The
rampant inflation between 1946 and 1949 was gradually brought under control. The timely
arrival of U. S. economic aid provided much-needed financial support. In addition, several steps
were taken to stabilize rice prices as a hedge against inflation. These prices in turn helped
stabilize wages, production costs, and commodity prices.
In order to keep the market stable and the rice stockpile at a safe level, the government collected
rice by all means, including paddy land taxes in kind, the compulsory purchase of paddy rice
from paddy landowners, rent on government-owned farmland, and the bartering of fertilizers for
rice. The means used in collecting rice often did not reflect the market price and hence became a
hidden tax on rice growers, which by 1963 was in excess of the total income tax.
From 1952 to 1972 Taiwan changed from a primarily agricultural to an industrialized economy.
Agriculture contributed to Taiwan's industrialization and economic growth by providing labor,
capital, agricultural goods, and a sizable market for non-farm products. Higher industrial wages
and non-farm job opportunities led to outflows of farm labor. Moreover, farm taxes paid for the
education of migrant farm laborers, which constituted a subsidy for the non-farm economy.
Between 1931 and the outbreak of war, capital outflows from agriculture increased. They
declined in 1950-60 but then picked up again in 1961-69. Changes in the terms of trade against
agriculture accounted for more than half of the total net real capital outflow in the postwar
period. This was a considerably higher share than before the war, when land-rent payment and
government taxes accounted for the lion's share of the agricultural surplus transferred to non-
agriculture. Government policies clearly have played an important role in determining the speed
of flow and the means of transferring farm capital.
The relatively large and booming agricultural sector provided an important market for consumer
goods, farm machinery and various intermediate inputs such as fertilizer and chemicals.
Purchases of nonagricultural products by farmers accounted for about 55 percent of the total
value of agricultural production, or about 90 percent of the total sales of agricultural products.
This sizable and easily accessible market facilitated Taiwan's industrialization, especially in the
1950s but also in the 1960s.
Despite rapid industrialization from the 1950s through the 1970s, Taiwan's population was slow
to pursue urbanization, in large part because of the balanced development of the agricultural and
nonagricultural sectors and the pattern of industrial development. A prosperous agricultural
sector can slow down out-migration of farm labor by providing a competitive wage. Good
transportation, widely spread industrial sites, and relatively small-scale operations with low
capital intensity all helped to keep farm labor employed in rural areas.
Almost every factor favorable to more balanced regional development also helped equalize
income distribution. When family income from agriculture lagged, that from non-agriculture
made up part of the loss and slowed the widening income gap between farm and non-farm
households. A significant increase in female labor in non-farm jobs also benefited low-income
farm families.
After the surplus labor became absorbed, however, agriculture began experiencing numerous
difficulties. In 1965 the number of farm laborers started declining, and wages in rural areas then
went up. As a result, farm labor developed an aging problem. Furthermore, the farm sector was
unable to compete with non-farm sectors for land. Meanwhile, the supply of fertile land was
shrinking, and the land regulations originally designed to prevent land concentration stood in the
way of more productive land use by increasing farm size. Farms thus became smaller, and the
number of part-time farmers increased because farming income had become inadequate and
abundant job opportunities were available elsewhere. In addition, rural areas have suffered
environmental problems because of the pollution caused by both industry and farming.
Finally, rising incomes have changed food consumption patterns, and thereby the structure of
domestic farm production. At the same time, agricultural imports have provided strong
competition for domestic products. In order to cope with structural changes in agriculture, the
government initiated a series of policies to alleviate the burden of taxes, reduce fertilizer prices,
and eventually abolish the rice-fertilizer barter system. These policies promoted new investment
in agricultural infrastructure and research and development. They also encouraged institutional
arrangements for zoning and marketing. After the first oil crisis, a rice price support policy was
adopted to encourage rice production for food self-sufficiency and to improve farmers' incomes.
As expected, this policy caused an overproduction of rice and caused a heavy drain on the
government's budget. The policy was modified to limit the amount of rice purchased and
provided subsidies to encourage a shift from rice to other crops.
5. Argentina
Agricultural development in Argentina presents an interesting contrast to the above cases. Like
the United States, Canada, and Australia, Argentina developed, during the 19th century, an
agricultural system based on an abundance of land and a relative scarcity of labor. By the late
1920s, Argentina ranked among the leading countries in the world with respect to income per
capita. Its prosperity was based on an economic system that involved:
 Exportation of agricultural raw materials, particularly food and feed grains, oil crops, and
meat and wool
 Importation of manufactured capital equipment and consumer goods
The disorganization of international markets during the world depression of the 1930s and during
World War II impressed upon Argentina's policy-makers the desirability of developing a more
diversified economy. Industrialization became a major policy goal.
In an effort to increase the foreign exchange earnings needed to finance industrialization,
Argentina established a government monopoly to handle the export of primary commodities. The
monopoly paid low prices to Argentina's agricultural producers and attempted to bargain for the
highest possible prices for the export commodities on world markets. The prices received by
Argentine farmers were kept far below world market prices. This was equivalent to a heavy tax
on agricultural production.
The effect was to dampen incentives either to produce or to export agricultural commodities.
Agricultural production increased by less than 10% between the periods 1945-1949 and 1959-
1961. Argentina's share of world exports of a number of major agricultural commodities declined
sharply from prewar levels. This weakened Argentina's capacity to import. By the mid-1950s,
imports of capital goods needed for industrialization had dropped below prewar levels.
The lack of price incentives might have been partially offset if Argentina had given support to
technological change in agriculture by building agricultural research and extension programs in a
manner comparable to the United States and Japan. Even today, however, Argentina has only a
relatively weak agricultural research and extension establishment. Corn yields remain relatively
low compared to those of the United States and a number of other countries.
Thus the heavy taxation of Argentina's agricultural technology killed the goose that laid the
golden eggs that were expected to pay for the program of industrialization. Today Argentina's
income per capita ranks her either as one of the less prosperous developed nations or one of the
more prosperous developing nations, rather than in the position among world leaders that she
held in the 1920s.
Argentina's heavy taxation of agricultural exports, in such a way as to reduce directly the prices
received by farmers, was in sharp contrast to the policies adopted by the Japanese during the last
3rd of the 19th century. Japan successfully utilized the export earnings from tea and silk to finance
industrialization. Distortion of production incentives was avoided by using a heavy land tax to
raise revenue from agriculture instead of directly interfering with prices. The favorable prices for
silk and tea were allowed to act as incentives to produce supplies for export, and the land tax,
which was not affected by the level of production, was used to finance industrialization.
During the 1970s, there were some indications that Argentina was beginning to adopt policies
that would provide greater incentives for agricultural production. The response of agricultural
production and exports to these greater incentives has, however, been obscured /masked by the
extremely high rates of inflation in Argentina.
4.3. The Performance of Agriculture in Accomplishing Economic Growth and Poverty
Reduction of the World
In the agriculture-based countries, which include most of Sub-Saharan Africa, agriculture and its
associated industries are essential to growth and to reducing mass poverty and food insecurity.
Using agriculture as the basis for economic growth in the agriculture-based countries requires a
productivity revolution in smallholder farming. How to implement it after many years of limited
success remains a difficult challenge. But conditions have changed, and there are many local
successes and new opportunities on which to build. Agriculture contributes to development in
many ways.
As an economic activity: Agriculture can be a source of growth for the national economy, a
provider of investment opportunities for the private sector, and a prime driver of agriculture-
related industries and the rural non-farm economy. In agriculture-based countries, agriculture
generates on average 29 percent of the gross domestic product (GDP) and employs 65 percent of
the labor force. The industries and services linked to agriculture in value chains often account for
more than 30 percent of GDP in transforming and urbanized countries.
Agricultural production is important for food security because it is a source of income for the
majority of the rural poor. It is particularly critical in a dozen countries of Sub-Saharan Africa,
with a combined population of about 200 million and with highly variable domestic production,
limited tradability of food staples, and foreign exchange constraints in meeting their food needs
through imports. These countries are exposed to recurrent food emergencies and the uncertainties
of food aid, and for them, increasing and stabilizing domestic production is essential for food
security.
As a livelihood: Agriculture is a source of livelihoods for an estimated 86 percent of rural
people. It provides jobs for 1.3 billion smallholders and landless workers, “farm-financed social
welfare” when there are urban shocks, and a foundation for viable rural communities. Of the
developing world’s 5.5 billion people, 3 billion live in rural areas, nearly half of humanity. Of
these rural inhabitants an estimated 2.5 billion are in households involved in agriculture, and 1.5
billion are in smallholder households.
The recent decline in the $1-a-day poverty rate in developing countries – from 28 percent in
1993 to 22 percent in 2002 has been mainly the result of falling rural poverty (from 37 percent to
29 percent) while the urban poverty rate remained nearly constant (at 13 percent). More than 80
percent of the decline in rural poverty is attributable to better conditions in rural areas rather than
to out-migration of the poor. So, contrary to common perceptions, migration to cities has not
been the main instrument for rural (and world) poverty reduction. But the large decline in the
number of rural poor (from 1,036 million in 1993 to 883 million in 2003) has been confined to
East Asia and the Pacific. In South Asia and Sub-Saharan Africa, the number of rural poor has
continued to rise. In these regions, a high priority is to mobilize agriculture for poverty reduction.
As a provider of environmental services: In using (and frequently misusing) natural resources,
agriculture can create good and bad environmental outcomes. It is by far the largest user of
water, contributing to water scarcity. It is a major player in underground water depletion,
agrochemical pollution, soil exhaustion, and global climate change, accounting for up to 30
percent of greenhouse gas emissions. But it is also a major provider of environmental services,
generally unrecognized and unremunerated, sequestering carbon, managing watersheds, and
preserving biodiversity. With rising resource scarcity, climate change, and concern about
environmental costs, business as usual in the way agriculture uses natural resources is not an
option. Making the farming systems of the rural poor less vulnerable to climate change is
imperative. Managing the connections among agriculture, natural resource conservation, and the
environment must be an integral part of using agriculture for development.
The way agriculture works for development varies across countries depending on how they rely
on agriculture as a source of growth and an instrument for poverty reduction. The contribution of
agriculture to growth and poverty reduction can be seen by categorizing countries according to
the share of agriculture in aggregate growth over the past 15 years, and the current share of total
poverty in rural areas, using the $2-a-day poverty line. This perspective produces three types of
countries three distinct rural worlds: agriculture-based countries, transforming countries, and
urbanized countries. Let us look at the case of the agriculture-based countries.
In the agriculture-based countries, agriculture is a major source of growth, accounting for 32
percent of GDP growth on average mainly because agriculture is a large share of GDP – and
most of the poor are in rural areas (70 percent). This group of countries has 417 million rural
inhabitants, mainly in Sub-Saharan countries. Eighty-two percent of the rural Sub-Saharan
population lives in agriculture-based countries.
There are many success stories of agriculture as an engine of growth early in the development
process and of agriculture as a major force for poverty reduction. Parallel to these successes are
numerous failures in getting agriculture moving. Most striking is the still-unsatisfactory
performance of agriculture in Sub-Saharan Africa, especially when contrasted with the green
revolution in South Asia.
In the mid-1980s, cereal yields were comparably low and poverty was comparably high. Fifteen
years later in South Asia, yields had increased by more than 50 percent and poverty had declined
by 30 percent. In Sub-Saharan Africa, yields and poverty were unchanged. Food security remains
challenging for most countries in Africa, given low agricultural growth, rapid population growth,
weak foreign exchange earnings, and high transaction costs in linking domestic and international
markets.
The process of economic development is one of continuous redefinition of the roles of
agriculture, manufacturing, and services. Two empirical regularities characterize this structural
transformation. First, at low levels of development, the shares of agriculture in gross domestic
product (GDP) and in employment are large (up to 50 percent and 85 percent, respectively), but
they decline as countries develop. Second, there is a large and persistent gap between the share
of agriculture in GDP and the share of agriculture in the labor force. These two stylized facts
suggest an essential but evolving role for agriculture in fostering growth and reducing poverty.
These patterns of structural transformation have been observed historically in most developed
countries and are currently taking place in developing countries that experience growth. But
there are noteworthy deviations.
In most Sub-Saharan countries over the last 40 years, the share of labor in agriculture has
declined dramatically despite almost no growth in per capita GDP, as exemplified by Nigeria.
The same is true for Latin America since 1980, as exemplified by Brazil. This is consistent with
the observed urbanization of poverty in these two regions. By contrast, the reallocation of labor
out of agriculture has been very slow in China, partly because of restrictions on labor mobility,
which, given rapid growth outside of agriculture, is consistent with an increase in the rural-urban
divide.
The large share of agriculture in poorer economies suggests that strong growth in agriculture is
critical for fostering overall economic growth. As GDP per capita rises, agriculture’s share
declines, and so does its contribution to economic growth. This happens while agricultural output
simultaneously increases in absolute value, because the non-agricultural sectors are growing
faster.
The large and persistent gap between agriculture’s shares in GDP and employment suggests that
poverty is concentrated in agriculture and rural areas and that as non-agricultural growth
accelerates, many of the rural poor remain poor. The persistent concentration of (absolute and
relative) poverty in rural areas illustrates the difficulty of redistributing income generated outside
of agriculture and the deep inertia in people’s occupational transformation as economies
restructure.
Migrating out of agriculture to urban areas is often hampered by lack of information, cost, skill
gaps, aging, and family and social ties. Consequently, many people remain in rural areas with
expectations for better lives unfulfilled, generating social and political tensions that can
jeopardize the growth process. Broad-based growth in the rural economy appears essential for
reducing both absolute and relative poverty.
Indeed, from a simple decomposition, 81 percent of the worldwide reduction in rural poverty
during the 1993-2002 periods can be ascribed to improved conditions in rural areas; migration
accounted for only 19 percent of the reduction. The comparative advantage of agricultural
growth in reducing poverty is also supported by econometric studies. Cross-country econometric
evidence indicates that GDP growth generated in agriculture has large benefits for the poor and
is at least twice as effective in reducing poverty as growth generated by other sectors, controlling
for the sector’s size. However, as countries get richer, the superiority of growth originating in
agriculture in providing benefits for the poor appears to decline.
When the staple crop sector is large and non-tradable, gains in staple crop productivity increase
the aggregate food supply and reduce food prices. That keeps the nominal wages of unskilled
workers as well as the prices of all the inputs that have large labour content at lower levels,
thereby helping make the non-food tradable sector competitive. For major staples in Africa, there
is evidence of a negative correlation between per capita production and price for maize in
Ethiopia and Ghana; sorghum in Burkina Faso, Mali, and Sudan; cassava in Ghana; and (weakly)
millet in Burkina Faso, Mali, and Sudan. However, this transmission mechanism will be
sustained only if the gains from total factor productivity rise faster than the decline in food prices
so that farmer profitability is maintained. If not, farmers may abandon the technologies that
induced the productivity gains in the first place.
The poverty-reducing effects of enhancing production in the farm sector depend on the net
marketing position of the poor and the price elasticity of food demand. Poor net-food-buying
households benefit from lower food prices, as long as the gain from reduced spending on food
exceeds the loss from reduced wage income. Poor net-food-selling producers, by contrast, gain
only if productivity grows faster than prices fall. Given that demand for staple crops is usually
price inelastic, producers may well lose. Even so, increasing staple crop productivity usually
reduces poverty overall, because in addition to the urban poor, more than half of poor rural
households are typically net food buyers.
The poverty-reducing effects of developing tradable agriculture depend on the participation of
smallholders and poor households in production. Labour intensive non-traditional exports can
also have substantial local poverty-reducing effects by generating employment, as in Kenya and
Senegal, despite the tightening food standards and more vertically integrated market chains that
tend to favour medium farms.
Higher agricultural productivity generating an agricultural surplus, taxed to finance industrial
development, and enabling lower food prices underpinned early development in Western Europe,
the United States, and Japan, and later in Taiwan, China, and the Republic of Korea. More
recently, rapid agricultural productivity growth in China and India has been widely credited with
initiating industrialization and inducing rapid reductions in poverty. The critical insight from
these successful experiences is that the adverse effects of surplus extraction on agriculture were
each time counterbalanced (or predated) by public investment in scientific research for
agricultural technologies and in rural infrastructure, including irrigation. Premature and unduly
high extraction through an urban policy bias combined with a lack of public investment in
agriculture despite good growth potential are the key reasons for sluggish agricultural
performance in many agriculture-based countries.
Chapter Summary
 Over time, economic development has stimulated a process of structural transformation
during which broad-based productivity growth accompanied a shifting sectorial composition
of economic activity.
 Economic transformation is visualized as an interrelated set of long-run processes of
structural changes that accompany growth.
 In explaining the acceleration of economic growth, the causal factors that attract the most
attention are matters of technology and large scale investment.
 The land-tenure system placed increased burdens on the tenants and dampened incentives to
produce.
 The experimental stations continued to play a significant role in the postwar restructuring.
 Government policies clearly have played an important role in determining the speed of flow
and the means of transferring farm capital.
 Good transportation, widely spread industrial sites, and relatively small-scale operations with
low capital intensity all helped to keep farm labor employed in rural areas.
 The process of economic development is one of continuous redefinition of the roles of
agriculture, manufacturing, and services.
Review Question
1) Mention three ways through which the growth of the industrial sector contributes to the rapid
development of the agricultural sector.
2) How can we increase and what options are there to increase agricultural food production at
macro level?
3) Define structural transformation
4) Explain the reasons why all three major theories of development were largely unsuccessful.
5) State the two preconditions that need to be fulfilled for transfer of capital from agriculture to
the non-agricultural sectors.
6) Mention three ways through which the growth of the industrial sector contributes to the rapid
development of the agricultural sector
7) Explain how the role of agriculture declines using the concept of Engle’s Curve.
 CHAPTER FIVE
5. MODELS OF AGRICULTURAL GROWTH
5.1. INTRODUCTION
In this chapter, we will deal with agricultural models practiced from primitive stage to the
highest stage of agriculture transformation. Our assumption is that the international trade would
be favorable. According to historical evidences supported by theoretical evidences the supply of
land is fixed and population is increasing. In this chapter, we have taken and see six models to
answer including different questions. All models except the first, assume that land supply is
inelastic. The theoretical review of six different models that have relevance to LDCs. Precise
examination of the relevance of each model to the Ethiopian policy practices will be provided.
Agricultural modeling has evolved into detailed dynamic simulations of most physical, chemical,
biological, biochemical, and biophysical processes in agroecosystems and their response to
climate and crop management inputs.
Chapter Objective
After reading this unit, you will be able to understand:
 The nature and meaning of agricultural growth
 The different models of agricultural growth/development and
 Applicability and implementation practice of the models in the Ethiopian context
 The link between agricultural development and population growth
 Further understand how the use of combined technologies like biological, chemical and
mechanical technologies develops the agricultural economy.
 4.1. Agricultural Growth
The basic concepts of agricultural growth will be given followed by analysis of trends and
determinants of agricultural growth with reference to the case of Ethiopia and other countries.
The agriculture sector is considered a major determinant of overall economic growth and the
well-being of people because of its significant contribution to GDP, export earnings,
employment, and food availability.
Agriculture is dominating the Ethiopian economy, and recently accounting for 80 percent of
national employment, 41 percent of gross domestic product (GDP) and 33 percent of total
exports or 70 percent of merchandise exports. More than 80 percent of these agricultural output
and value-added (amounting to more than a quarter and a third of national output and value-
added, respectively) is generated by subsistence farming. More interestingly, subsistence
livestock production accounts for close to 40 percent of agricultural output and a third of value-
added.
Agricultural growth helps reduce poverty directly through an increase in farmers' income. The
indirect effect of agricultural growth on poverty reduction occurs through the spending of
farmers' income on locally produced non-agricultural goods. Available literature regarding the
linkages of agricultural growth and poverty reduction argues that the increased demand for non-
agricultural goods leads to a much larger increase in employment, which is the main vehicle for
poverty reduction in rural areas. High agricultural growth is, therefore, considered a key factor in
ensuring macroeconomic stability and poverty reduction. Understanding the effect of agricultural
growth on poverty requires an in-depth analysis of trends in agricultural growth.
Overall agricultural growth is a composite of the growth of different sub-sectors, e.g., crop and
livestock. Each of these sub-sectors has a different impact on income distribution, and,
accordingly, on poverty. Any conclusive statement regarding the growth and poverty
relationship, therefore, needs to be made in the light of a disaggregated analysis. For instance, in
the case of Ethiopia, empirical evidence reveals that large growth linkages are generated by
agricultural activities. This arises primarily because of much higher value-added created by the
direct increase in agricultural outputs. As a fraction of the gross value of output, value-added can
be as high as 91 percent in agriculture, the sector-average being 78 percent.
Model results reveal that the impact of agricultural growth on poverty is larger when the
additional growth is driven by agriculture rather than non-agriculture. Given its larger impact on
poverty, agricultural-led growth in Ethiopia lifts more rural people out of poverty compared to
nonagricultural-led growth. Non-agriculture-led growth reduces urban poverty more than
agriculture-led growth. In total, however, there will be a larger number of people coming out of
poverty in the agriculture-led growth compared to non-agriculture-led growth, despite the fact
that overall GDP grows at the same rate in both scenarios.
At a disaggregated level of analysis, estimates also show that growth in staple production
generates more than proportionate increase in total GDP. Moreover, such growth linkages
become stronger over time. On the other hand, the linkages from agricultural exports to total
GDP is strong only in the initial years, the linkages become weaker overtime. In light of the
usual focus on exports, it is useful to briefly comment on why growth in staple crops has such a
significant effect. Cereals and other staple crops are the most important income source for the
majority of small farmers. Domestic supply of staple crops is the most important source of food
energy for both rural and urban poor consumers. Both of these features are likely to continue to
apply for the next 10 years or so. Thus, raising productivity in staple crops will increase the food
supply, lower food prices, and help reduce the poverty rate in both rural and urban areas.
Clearly, better incentives and improved production conditions will give farmers more
opportunities to diversify. As a consequence, many presently subsistence crops grown
extensively by poor farmers can become marketable commodities and this shift would further
increase poor farmers’ cash income. On the contrary, available empirical evidence on the case of
Pakistan points to a totally opposite scenario. That is, contrary to the case of Ethiopia, the
reasonable agricultural growth observed in the 1990s could not be translated into poverty
reduction. Rather, the consensus is that the percentage of rural persons living below the poverty
line has increased over time, especially since the late 1990s. According to official statistics, the
agriculture sector grew at an overall rate of 4.6% per annum during the 1990s.
However, after 1997, the combined scarcity of water and persistent drought affected agricultural
growth badly, causing economic growth to slow down during the last 2 years of the decade. The
crop sub-sector, in particular, declined during these years, with a substantial fall in the value-
added of major crops. However, the livestock and fisheries sub-sectors grew remarkably during
this period. Wheat, rice, cotton, and sugarcane account for 90% of the total major crop
production while the share of major crops in total agricultural value-added is 41%. This indicates
that these four crops contribute nearly 37% to the total agricultural value-added.
The share of wheat, rice, and sugarcane in the total major crop value-added has increased over
time, although that of cotton has declined, and yields show a fluctuating pattern during the 1990s
the cotton yield fluctuated between 0.77 to 0.49 tons per hectare in this period. These
fluctuations are reflected in the performance of the crop subsector and have a significant effect
on the performance of the overall agriculture sector and, therefore, on GDP. For example, a fall
in agricultural output in 1993 and 1997 coincided with a slowing down of overall economic
growth as reported in the Pakistan Economic Surveys for those years.
Agricultural policy makers are applying one or more models from theories for policy
formulations and realizing the development objectives of the agricultural sector. The theories of
agricultural development, based on Ruttan and Hayami, can be seen under five major models and
their practical implications to Ethiopia could be reviewed as follows (nevertheless the models
consist of in total nine): -
1. The resource exploitation model
2. The conservation model
3. The location model
4. The diffusion model
5. The high payoff input model
These are not regarded as models of stages in the agricultural growth but as changing sources of
growth during the process of agricultural development.
4.1.1. The Frontier (Resource Exploitation) Model
Exploitation is the act of selfishly taking advantage of someone or a group of people in order to
profit from them or otherwise benefit oneself. Exploitation is a noun form of the verb exploit,
which commonly means to take advantage in such a way. The adjective form is exploitative, as
in exploitative practices. The frontier model, also referred to as the resource exploitation model,
is based on the assumption that land is physically infinite had it not been for transportation costs
and problem of accessibility. There is, however, scarcity of good land, that is, land close to the
center (land with low distance cost) is limited in supply. Land is assumed to be homogeneous,
and differ only by the location as measured by distance from a center (village).
In principle, the approach recommends to progressively farm unused land so that increasing
production is achieved by increasing the gross catchment area of overall cultivation. With rising
population size and pressure, this model implies movement to an adjacent virgin land (the
frontier). Under subsistence agriculture dominated by primitive and unchanging technology, the
means to increase output has to be through increasing the size of farmland.
The farming system applied by the small holders in Ethiopia with primitive and unchanging
technological base implies the practice of extensive farming system. Thus, the structure of the
economy, the farming system used among the small holders as well as the investment
proclamations for the large scale commercial farmers (which indicate that investors should
follow the frontier (virgin or uncultivated) areas of agricultural development or those areas out of
the claim of peasants to participate in the investment activities on the sector) are based on the
notion of frontier agricultural development model.
For the practicability of this model, there should be available free land resource sufficiently and
favorably enough to all demanders. However, free land may not be endless and favorably
available at the commonly expected cost and technology. This is because uncultivated land is
usually of lesser quality and/or costlier to develop than the currently farmed. Much of currently
uncultivated land needs irrigation, drainage, stone or tree removal, or other investment before it
can be farmed profitably.
Of course, the possibility of applying frontier approach at the high lands of Ethiopia is closed
many years ago. At the highlands, there is very high population pressure, overgrazing, and the
land has been under cultivation for long period. Even the land areas in the relatively land
abundant regions are not absolutely free in that these areas are either used for grazing or covered
by forests. In addition, the free land potential is also to be evaluated from long term perspective
of development issue such as with questions of environmental problems and sustainability in
agricultural development. This approach in theory and the practice in many cases has been the
real source of deforestation, degradation, over grazing, erosion, etc. which is against the
conservation based development strategy of these days.
In general, applying the frontier model as a policy framework has a very limited and at shortest
time possibility so that it can't be taken as a means to develop/modernize the agricultural sector
for long run and nationwide purpose. Therefore, frontier approach is not a priority policy option
for Ethiopia and LDCs facing similar situation.
The primary concern of the scholars (staple and vent for surplus theories) were to explore the
conditions by which underutilized natural resources could be exploited to generate growth in
agricultural output and to identify the processes by which agricultural surplus could be mobilized
to generate growth in the whole economy. Environmental concerns such as global warming,
ozone layer depletion, pollution, and land degradation have resulted from indiscriminate and
unrestrained resource extraction with no regard for the future.
Criticisms of the Model
The major problems (criticisms) observed were:
o Little insight in to the problem of how to generate growth in productivity.
o Diminishing marginal productivity from additional increment of resources was
given less attention.
o Lack of due emphasis to the issue of sustainability
Overexploitation of natural resources such as trees can lead to habitat loss. Organisms that
previously lived around those natural resources are displaced, resulting in biodiversity loss.
While natural ecosystems are essential for plant and animal growth, overexploitation can lead to
severe issues like global warming, food insecurity, climate change, and mineral depletion. In
order to sustain agricultural growth, it is necessary to make a transition from resource
exploitation to:
a. Development of resource conserving or enhancing technologies such as crop rotation
and manuring
b. Substitution of modern industrial inputs such as fertilizers for natural soil fertility
c. Development of modern fertilizer responsive crop varieties
4.1.2. The Resource Conservation Model
At its core, theory is a motivational theory that explains much of human behavior based on the
evolutionary need to acquire and conserve resources for survival, which is central to human
behavioral genetics. Like other social animals, humans must acquire and conserve both personal
strengths and social bonds. Using resources carefully and giving them time to get renewed is
called resource conservation. There are many ways to conserve resources. Each of us can
conserve resources by reducing consumption, reusing and recycling.
The conservation model is concerned with the application of the laws of diminishing returns to
agricultural sector with the assumptions that:
▪ Land for agricultural production is scarce and increasingly becoming more so scarce with
the passage of time
 ▪ Soil exhaustion is possible and action to prevent decreases in yields or to increase land
productivity will have only slow effect at best.
Thus, as land scarcity increases, poorer land is used causing the marginal productivities of labor
and land to decrease. To prevent these declines, high priority is attached to maintaining soil
productivity at its present level or attempting to return the soil to its original presumably more
productive level in the extreme conservation model.
The model emphasizes the evolution of a sequence of increasingly complex land-saving and
labor-intensive cropping systems, the production and use of organic manure, and labor-intensive
capital formation in the form of drainage, irrigation and other physical facilities to more
effectively utilize land and water resources. Thus, this model doesn't presuppose industrialization
as the inputs required are obtained from within the agricultural sector itself.
The principle of reducing waste, reusing and recycling resources and products is often called the
"3Rs." Reducing means choosing to use things with care to reduce the amount of waste
generated. Reusing involves the repeated use of items or parts of items which still have usable
aspects. Recycling means the use of waste itself as resources. Waste minimization can be
achieved in an efficient way by focusing primarily on the first of the 3Rs, "reduce," followed by
"reuse" and then "recycle."
The model is criticized for it fails to recognize the contribution of industrially produced inputs in
increasing agricultural production as well as the impact of technological changes on the types of
the demand for land in agriculture. That is, non-farming uses of land do really increase with the
decrease in the relative importance (share and role) of the sector resulting from technological
advances in an economy. In addition, the applicability of this model is limited to cases where the
rate of population growth is a reasonable one; it doesn’t work where the rate of population
growth is extremely high.
The conservation model is applied currently over many countries in the world. It is widely and
increasingly becoming important in practice since sustainability focusing on natural resources
and environmental issues have started to be main international and national agenda of
discussions and, hence, attracting the attentions of policy-makers. This model was dominant in
Europe before the industrial revolution until it left its place for the intensive/industrial
agriculture.
However, due to the negative effects of the use of chemicals in the industrial agriculture on
human health and the environment, the conservation model has recently revived in a modified
form Organic Farming System. The share of agricultural products from organic farming is
expanding in Europe and USA though slowly. The slow rate of expansion is attributed, at least
partly, to the fact that the model is labor-intensive and labor is scarce in these countries.
The tremendous ecological and economic loses of land degradation and soil loses in Ethiopia
provide a justifying ground for the applicability of the model. The conservation model was and is
still a practical response to the alarming rate of loses from degradation (in terms of cereal
production). In the current socio-economic development policy of Ethiopia, the development
strategy of agricultural sector emphasizes that the development effort should be in line with a
guiding principle of conservation based agricultural development strategy.
As a result, conservation model has explicit legal and policy basis of application in the country.
However, in addition to financial values, economic and social values of investments should be
taken in measuring the value of land, and thus, the conservation measure should be the duty and
responsibility of governments and should not only be the practical duty and immediately felt
problem of individual farmers. Summarized in economic terms, the doctrine asserts that natural
resources are scarce, that the scarcity increases with economic growth and that resources scarcity
threatens to impair levels of living and economic growth.
Criticism of the Model
o The perspective of agriculture was seen as a relatively self-contained system. Therefore,
industrial inputs were not viewed as playing a significant role at either the extensive or
intensive margin.
o An attempt to explore the economic importance of conservation principle, particularly in the
field of fertility maintenance, as a guide to agricultural development practiced lately.
By the early 1950s as new body of literature embracing both technical (soils, plant nutrition,
agronomic, engineering) and economic consideration was leading to a more rational view of both
the farm management and public policy aspects of soil fertility and the role of land in agricultural
development. With the new perspectives in the theory, it has been possible to analyze and test the
resource scarcity more rigorously using the study of scarcity and growth by Barnett and Morse
taking strong and weak versions of the scarcity hypothesis.
The strong scarcity test is based on change in the unit cost of extractive output. The definition is
based directly on the classical notion that as the quantity of land that is brought into production
declines, larger and larger dose of labor and capital are required to produce a unit of extractive
output. The weak scarcity test is based on change in the relative price of the extractive products.
A rise (decline) in the price of the extractive produce relative to the general price level is taking
to indicate an increase (decrease) in scarcity.
The weak scarcity test is generally regarded as a more relevant measure because the price of
extractive products reflects the effect of expectations regarding the future costs of exploration,
discovery, and extraction of productivity growth in the extractive industries. In spite of the some
criticisms, agricultural development efforts carried out within the framework of the conservation
model can continue to make an important contribution to productivity growth.
To evaluate the relevance of the model in Ethiopia, it is helpful to assess the ground that justifies
the application of the model. According to the ‘Ethiopian Highlands Reclamation Study’, the
ecological and economic loses are proved to be tremendous. In 1983, degradation was estimated
to cost Ethiopia for about 600 million birr per annum, which was found to be equal to 14 per cent
of the contribution of agriculture to GDP of the time.
In the current socio-economic development policy of Ethiopia, the development strategy of
agricultural sector emphasizes that the development effort should be in line with a guiding
principle of conservation based agricultural development strategy. As a result, conservation
model has explicit legal and policy bases of application in the country. In general, after
considering ADLI as priority task in the macro development strategy in current Ethiopia, there
are few new inclusions in relation to agricultural development efforts in the policy frameworks
ensuring the application of conservation model. The inclusions are:
 The establishment of Environmental Protection Authority, with relevant regional and
zonal offices, that formulates and implements rules and regulations regarding the use of
land, water and natural resources of the country.
 The recent regulation enacted to control the use of agricultural chemicals impacts on the
control of various diseases, insects, weeds and vegetable pests that will in turn contribute
a lot to the sustainability of agriculture.
  Pertaining Ethiopia being signatory of International Convention on Environmental
Protection, which strengthens efforts to control the existing and potential environmental
degradation.
 The attention given to pastoral farming system, which is practically at a premature, is also
another implication to be looked on environmental conservation issues.
4.1.3. The Location Model (The Urban Industrial Impact Model)
The location model was initially formulated to explain geographic variations in the location and
intensity of agricultural production in an industrializing economy. This model primarily explains
the changing distribution of commodity production in response to changes in transport cost and
variations in the national environment.
In economics, a location model or spatial model refers to any monopolistic competition model
that demonstrates consumer preference for particular brands of goods and their locations.
Location analysis is a technique for discovering, assessing and specifying the optimal placement
of an organization's people, information, activities, and materials. Location analysis can include
developing models, techniques, and tools to help provide solutions to location based problems.
This model relates agricultural productivity and development with:
▪ The distance from urban/industrial areas, and
▪ The development effects of urban/industrial areas.
It hypothesizes that the determinant factor of productivity and development in agriculture is the
distance and cost of transporting agricultural products to the urban market, i.e., bulky and
perishables tend to be near urban and industrial areas while the less perishables tend to be
produced far away on lower cost land. The development of urban industrial centers stimulates
agricultural development by expanding demand for farm products, by supplying the industrial
inputs needed to improve agricultural productivity, and by drawing away surplus labor from
agriculture.
Studies show that the policy implication of the urban industrial impact model appears to be most
relevant for less developed regions of highly industrialized countries or enlarging regions of the
more rapidly growing LDCs. However, agricultural development policies based on this model
appear to be practically inappropriate in those countries where the abnormal growth of urban
centers is a result of population pressures in rural areas running ahead of the empty growth in
urban areas. Moreover, particularly in Africa, the industrial sector depends more on imported
inputs than the inputs provided by domestic agricultural sector, and thus, the assumed back-ward
linkage from industry to agriculture turns out to be very weak.
All the idea and conclusions in favor of the model seem to prove the natural process or trend that
will bring about the development of agricultural sector rather than considering as results
achieved through conscious action in policy formulations and implementations. Thus, it cannot
be taken as an instrument for policy measures in planning techniques and development strategy.
The practical dispersal of urban and industrial centers over the land areas of present LDCs will
also imply much more slow effect to change the agricultural sector or to develop the national
economies of such countries. In other words, for the traditional agriculture and economies, the
model cannot have immediate and observable results.
Development polices based on the urban-industrial impact of agricultural development appear to
have limited scope in the poorest of the less developed countries, where: -
a) The major problem is to initiate and accelerate economic growth at a sufficient rate to
absorb the growing labor force rather than the geographical distribution of economic
activity.
b) The technology necessary for rapid agricultural growth is not available.
c) The pathological growth of urban centers resulting from population inflow from rural
areas is running ahead of growth in the demand for non-farm workers.
Criticisms of the Model
Dear learners now develop you own criticisms to the location model of agricultural
development?
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This model can be said partially practiced in Ethiopia when the first effort was made to develop
the economy in 1945 when the ten-year program of industrial development was prepared. At this
initial stage of the policy practice, industrial development was believed to change and develop
the whole economy, while the remaining sectors were considered to change and develop as a
result of the industrialization. By implication, the model has also been partially exercised in the
subsequent few urban as well as industrial development policy, planning practices and budgetary
allocations of the country. Although, all policies, plans and strategies on paper insist on the
importance of agriculture sector to Ethiopia, the practice was far from the promise. As a result,
the agriculture sector of Ethiopia did not get the right share in budgetary allocation as much as its
contribution and expected role to play in the development of the whole economy.
4.1.4. The Technology Diffusion Model
In the (technology) diffusion model, agricultural development is assumed to be based on
devoting considerable resources to increasing the flow of information to farmers regarding new
agricultural technology and new institutional arrangements, and teaching tradition-bound farmers
how to make more economically rational management decisions about the uses of resources they
have access to. Diffusion Models are generative models, meaning that they are used to generate
data similar to the data on which they are trained. Fundamentally, Diffusion Models work by
destroying training data through the successive addition of Gaussian noise, and then learning to
recover the data by reversing this noising process.
At a high level, Diffusion models work by destroying training data by adding noise and then
learn to recover the data by reversing this noising process. In Other words, Diffusion models can
generate coherent images from noise. Diffusion models train by adding noise to images, which
the model then learns how to remove.
Diffusion theory concerns with the spread of an innovation through a population. Researchers in
diffusion theory have developed analytical models for explaining and forecasting the dynamics
of diffusion of an innovation (an idea, practice, or object perceived as new by an individual) in a
socio-technical system. The diffusion of innovation theory explains the rate at which consumers
will adopt a new product or service. Therefore, the theory helps marketers understand how trends
occur, and helps companies in assessing the likelihood of success or failure of their new
introduction.
The recommendation of this model draws from observed variations of land and labor
productivities among farmers and regions as evidenced empirically. To narrow down such
differences across regions of a nation (or regions of the world), the development of agriculture in
the diffusion model is realized through more effective dissemination of technical knowledge
carried out by extension workers. However, empirical findings indicate that the location specific
nature of agricultural technology had become a great limiting factor of the diffusion of much
agricultural technology. In any area, agriculture usually requires much local adaptation of
farming practices. In addition to this problem of technological appropriateness, the cost of
transfer could be high (as opposed to the assumption of the model).
The limitations of the diffusion model which have been identified in empirical research works
are summarized as follows:
 Traditional farmers have good knowledge of available traditional technology and are
effective allocators of their resources. Hence, extension efforts devoted to trying to teach
these farmers as how to improve the allocation of their traditional resources are wastage.
 There has often been little new agricultural technology available in LDCs that would be
productive if diffused.
 Extension personnel have often not been well trained and thus they have not been able to
successfully transfer to farmers the available useful knowledge.
 The extension agents have generally lacked detailed personal knowledge of agricultural
and social conditions in the areas they were supposed to improve, as they have often been
outsiders, government appointees from urban or other parts of the nation.
In Ethiopia, although the initial efforts of extension activities on disseminating and
demonstrating fertilizer application partially improved seeds cultivation and new farming
practices have shown good results, it could not be sustained. The effort to acquaint farmers with
new farming practices has not registered significant result even at the beginning. The reason for
all is that, on the one hand, the income of farmers is not so much enabling to go beyond the
common expenses. On the other hand, the prices of inputs are continuously increasing so that
limiting further diffusion among the smallholder farmers of Ethiopia. Moreover, the contribution
of communication system such as newspapers, magazines, radio and television etc., which are
commonly recommended by the model, are almost irrelevant to the Ethiopian farmers at the rural
areas where there is no network of or access to such systems and most of the farmers are
illiterate. However, for the Ethiopian case, the diffusion model has relatively better importance,
wider bases for practices as well as strong sides for applications as compared to others.
The new extension, demonstration and training program could change production and
productivity level although the result is not significant and could not be sustained. As to the
extension agents, the workers are recruited from the localities where they are supposed to be
assigned so that they know sufficiently the societies of their assignment which is one of the
bottlenecks of diffusion otherwise.
The recent extension, demonstration and training programme are widely applied in Ethiopia, but
in effect, transformation of the sector is not sustainable and secured sufficiently. As a result, it
needs further complementarities for the modernizing and transforming efforts that can
disintegrate the sector from dependency on natural phenomena at first and to sustain the
development results in the long run.
4.1.5. The High Payoff Inputs Model
Urban-industrial impact and diffusion model led to a new perspective in the 1960s. The key to
transforming a traditional agricultural sector into a productive source of economic growth is an
investment designed to make modern, high-pay off inputs available to farmers in poor countries.
The key to transforming a traditional agricultural sector into a productive source of economic
growth is an investment designed to make modern, high-pay off inputs available to farmers in
poor countries. The practical inability of the above models to explain and catch the development
problems of the agricultural sector have led to conceiving of and shifting to other alternatives.
Among such alternatives, the application of technological or industrially produced inputs to the
agricultural sector was recommended specifically to improve the failures of the conservation, the
urban industrial impact, and the diffusion models.
According to this new conception, transformation of traditional agriculture is believed to be
undertaken by investments aimed at increasing the availability and supply of modern high payoff
inputs to farming activities. Schultz, who developed this model, highly emphasized that
traditional farmers of poor countries are efficient, rational resource allocators within their
farming system except their lack of technical and economic opportunities, which could enable to
improve the system. As he recommended therewith, the supply of new technological inputs and
the availability of such opportunities, therefore, could enable the traditional farmers to make use
of the chances and overcome their poverty.
According to Schultz, new high payoff inputs are the capacities of:
1. Public and private sector research institutions (agricultural experimental stations) to produce
new technical knowledge.
2. The industrial sector to develop, produce and market new technical inputs. These Green
Revolution inputs include products of chemical technologies like fertilizers and pesticides
as well as biological technologies such as high-yielding seeds.
 3. Farmers to acquire new knowledge and use new inputs efficiently. This capacity depends on
the farmers’ level of awareness and income level.
Based on these facts, Schultz had hypothesized that investment in agricultural technology
development and human capacity building could enable to produce more productive technologies
and productive farming people. This in turn could lead to generate new technologies, adopt the
available ones to the economies of poor countries and overcome the problems of
inappropriateness of the inputs produced by the body of knowledge in advanced countries. He
added that such investments would improve the availability and prices of modern agricultural
inputs which could be determinant to growth of the agricultural sectors of poor countries. As he
summarized the experiences of advanced countries, higher productivity capital equipment and
other inputs were the sources of the new high-payoff inputs. From this, he recommended for due
emphases on such investments which he thought to be the key to economic growth from the
agricultural sectors of poor countries.
The model is criticized on the following points:
▪ It doesn’t consider the role of farmers in the generation of new technologies.
▪ It assumes an effective demand for the new technologies; it doesn’t take into account that
farmers might not afford new technologies with their low income.
▪ It assumes that governments are capable of generating new technologies.
▪ The model also assumes new technologies to be exogenous to the system, i.e., it doesn’t
tell us how new technologies are generated (or how economic conditions induce the
development and adoption of an efficient set of technologies for a particular society). It is
said to be an incomplete theory of agricultural development in that it doesn't explain the
mechanism by which resources are allocated among public goods such as education,
research and the like.
Practically, the Green Revolution was very successful in South and South East Asian countries
and completely the opposite for SSA countries. One of the reasons is that Asian agriculture is
highly homogeneous unlike that of SSA. The diversity and heterogeneity (in terms of crops, soil
and climate) of agriculture in SSA has perhaps hindered the application of single new
technology. Secondly, the fact that agriculture in the Asian countries was irrigated while
irrigation was hardly used in SSA explains the difference. In addition, differences between the
two regions in terms of infrastructure, culture, education, leadership, policy problems and the
international environment do explain the differences in the end results of Green Revolution.
In Ethiopia, the Institution for Rural Technology (for instance) has been trying to produce and
introduce new inputs and equipment designed for improved agricultural production and
productivity but practically unable to be fully effective. The main reason for this is that some of
the materials produced entail a large amount of money as compared to the financial background
of the farmers.
The Rural Technology Centers have dimensions of the diffusion model as well. In fact, the
dissemination of materials produced/installed at demonstration level also failed mostly because
the activities were undertaken without the participation of peasants, i.e., without the knowledge
and interest of the 'beneficiaries'. In short, the development of the technologies was not
participatory and in the interest of the beneficiary farmers. As interpreted generally, the model is
sufficient to embrace the central concepts of the conservation, location, and diffusion models of
agricultural development.
Criticism of the Model
The model does not incorporate the mechanisms by which resource are allocated among non-
marketable public goods such as how knowledge is transferred, how research is conducted, and
other public and private roles in the course of dissemination of high payoff inputs. The model
does not explain how economic conditions induce the development and adaptation of an efficient
set of technologies for a particular society. At last, the model does not explain how economic
conditions induce the development of new institutions such as publicly supported agricultural
experiment stations to enable both individuals and society to take fuller advantage of new
technical opportunities.
Although the model was criticized for the major problems of inapplicability at the micro level, it
is implicitly applied in Ethiopia by establishing the Rural Technology Center in order to produce
and introduce new inputs and equipment designed for improved agricultural production and
productivity but practically unable to be fully effective. The Rural Technology Centers (started
since long during the then Dergue regime and functional still) have dimensions of diffusion
model as well. In fact, the dissemination of materials produced/installed at demonstration level
also failed mostly because of the activities being carried out without the participation of peasants
from the very beginning.
 4.1.6. The Induced Innovation Model
The induced innovation hypothesis (IIH), that a change in relative input prices induces
innovation to economize use of the increasingly expensive input (Hicks 1932), has had a
profound impact on both macroeconomic and microeconomic production literature. Hayami and
Ruttan had proposed a theory of induced technology and institutional innovations in agriculture
by which they tried to overcome the limited knowledge provided by their predecessors as to how
agricultural production could be accelerated. Particularly, this model treats technology as
endogenous.
In other words, when demand for their products increases, farmers are lured by changes in
relative prices to seek for technological alternatives that substitute the increasingly scarce factors
of production. Here is where government intervention would be beneficial. This model has four
interacting elements: resource endowments, cultural endowments, technology, and institutions.
Any change in any of these elements due to changed supply or demand conditions could induce
changes in any other. The model was developed by considering technical changes as endogenous
factors of development process in which technological change is considered as a dynamic
response to changes in resource endowments and to growth in demand. In explaining that they
used productivity frontier in which productivity levels are associated to each employed resource
endowment classifications.
In the long-run, such resources could be made available to farmers through:
 Investment in agricultural research capacity needed to develop technologies appropriate
to countries' natural and institutional environments, and
 Investment in the physical and institutional infrastructures needed to realize the new
production potential opened up by technological advances.
 Changes in the relative prices of inputs could also affect the diffusion of technological
changes in addition to physical and institutional factors, which similarly affect
productivity levels.
The institutional innovation aspect of the induced innovation model emphasizes that the
institutional change is endogenous factor of economic growth and hence considered as
investment process entailing, resources just as in the creation of new technologies. The inclusion
of the cultural endowment version made the model a much more general socio-economic change
model since culture had been considered to constrain and direct a nation's capacity for
institutional and technical innovation. As a result, resources allocated to and the success of
science would be influenced by cultural factors or values related to the pursuit of knowledge and
sciences. This model is criticized for giving too much emphasis to the role of the invisible hand
(prices) and consequently limiting the role of government.
 To sum up, in fact, any one of the models does not suffice individually unless considered in
combination with one or more additional models with the necessary measures to adapt/adopt
to the specific real conditions of a country. In addition, the prevailing conditions of a country
should be studied in depth with respect to each model in order to arrive at tangible
conclusions and recommendations for appropriate policy, plan and strategy formulations,
implementations and evaluations. However, not all these models are equally important. The
urban industrial impact model is, for instance, an outdated approach for LDCs such as
Ethiopia wherein the main potentials for and the problems of development are found among
the rural societies and in the agricultural sector. The frontier model also presents an already
exhausted potential in most LDCs.
Chapter summery
 The agriculture sector is considered a major determinant of overall economic growth and the
well-being of peoples.
 The frontier model, also referred to as the resource exploitation model, is based on the
assumption that land is physically infinite had it not been for transportation costs and
problem of accessibility.
 The conservation model is applied currently over many countries in the world.
 Location analysis is a technique for discovering, assessing and specifying the optimal
placement of an organization's people, information, activities, and materials.
 Diffusion theory concerns with the spread of an innovation through a population.
 The key to transforming a traditional agricultural sector into a productive source of economic
growth is an investment designed to make modern, high-pay off inputs available to farmers
in poor countries.
 The institutional innovation aspect of the induced innovation model emphasizes that the
institutional change is endogenous factor of economic growth and hence considered as
investment process entailing, resources just as in the creation of new technologies.

Review Question
1. Mention the assumptions or conditions under which the frontier model could be applied
as a means to achieve agricultural development goals.
2. What are the basic assumptions underlying the conservation model?
3. Does the conservation model have any relevance to the Ethiopian agricultural sector?
Explain!
4. The location/urban industrial impact model is of practical relevance to less developed
regions of most African countries. Do you agree or disagree to this assertion. Explain.
5. Describe how the diffusion model could be an important option to the Ethiopian case.
6. State the major criticisms of the high payoffs inputs model
7. Evaluate the contribution of rural technology centers to the agricultural development in
Ethiopia.
 CHAPTER SIX
6. UNCERTAINTY AND FARM DECISION MAKING
6.1. INTRODUCTION
Dear students, it is to be recalled that the implications for economic policy of the theory of profit
maximizing peasant depend on the degree of acceptance of the various components of the
efficiency hypothesis. The uncertainties inherent in weather, yields, prices, Government policies,
global markets, and other factors that impact farming can cause wide swings in farm income.
In decision making under uncertainty individual decision maker (farmer) has to choose one
among a set of alternatives with complete information about their outcomes but in the absence of
any information or probabilities of the various states occurrence. Discounting for risk implies
that the farmer produces less than the optimum output level on average in order to reduce losses
in unfavorable seasons. Smaller production will reduce the losses if the situation turns out to be
unfavorable.
The uncertainties inherent in weather, yields, prices, Government policies, global markets, and
other factors that impact farming can cause wide swings in farm income. Risk management
involves choosing among alternatives that reduce financial effects that can result from such
uncertainties.
Risk management involves choosing among alternatives that reduce financial effects that can
result from such uncertainties. Therefore, the major policy implications vis-a-vise the efficient
hypothesis of peasants could be generalized as:
1) Peasants are efficient within the constraints of existing technology, and then change in
technology will be determinant in transforming peasant production system into modern
and advanced system of [transferring approach] the economic growth.
2) On the assumption that farmers are allocative responsive to price changes, then
manipulation of input and output prices (through credit schemes, subsidized fertilizer)
may have the effect to lower costs.
3) If inefficiencies result from market failures, then the working of markets should be
improved.
4) If farmers are technically inefficient then farmer education and extension has a major
role [improvement approach].
 6.2. Definitions of Risk and Uncertainty
What is risk?
We tend to distinguish between risk and uncertainty in terms of the availability of probabilities.
Risk is when the probabilities of the possible outcomes are known (such as when tossing a coin
or throwing a dice); uncertainty is where the randomness of outcomes cannot be expressed in
terms of specific probabilities. The terms Risk and Uncertainty are not strictly interchangeable in
the economic context. Risk has a rather precise meaning which is distinct from the descriptive
sense of uncertainty. Risk implies future uncertainty about deviation from expected earnings or
expected outcome. Risk measures the uncertainty that an investor is willing to take to realize a
gain from an investment. Risks are of different types and originate from different situations. Risk
is restricted to situations where probabilities can be attached to the occurrence of events, which
influence the outcome of a decision-making process. Example: If drought occurs on average in
two years out of five, the probability of a drought as risk occurring is 2/5 = 0.4 = 40%.
Uncertainty refers to epistemic situations involving imperfect or unknown information. It applies
to predictions of future events, to physical measurements that are already made, or to the
unknown. Uncertainty arises in partially observable or stochastic environments, as well as due to
ignorance, indolence, or both. It arises in any number of fields, including insurance, philosophy,
physics, statistics, economics, finance, medicine, psychology, sociology, engineering, metrology,
meteorology, ecology and information science. Uncertainty may range from a falling short of
certainty to an almost complete lack of conviction or knowledge especially about an outcome or
result. Uncertainty simply means the lack of certainty or sureness of an event. In accounting,
uncertainty refers to the inability to foretell consequences or outcomes because there is a lack of
knowledge or bases on which to make any predictions.
Uncertainty is a situation where it is not possible to attach probabilities to the occurrence of
events. The likelihood of the occurrence is neither known by the decision maker nor by anyone.
Uncertainty must be taken in a sense radically distinct from the familiar notion of risk, from
which it has never been properly separated. The essential fact is that 'risk' means in some cases a
quantity susceptible of measurement, while at other times it is something distinctly not of this
character; and there are far-reaching and crucial differences in the bearings of the phenomena
depending on which of the two is really present and operating. It will appear that a measurable
uncertainty, or 'risk' proper, as we shall use the term, is so far different from an unmeasurable
one that it is not in effect an uncertainty at all.
The distinction between them underlies through the following basis:
1. Risk as an objective matter: Assuming that enough information is available from weather
station records, and other research and extension institutes, risks can be measured while
uncertainty cannot.
2. Risk is based on decision makers’ personal degree of belief about the occurrence of
events.
3. Risk is based on the subjective problems attached by farm decision makers to the
likelihood of occurrence of different events.
6.3. Risk in Agriculture
Risk is an important aspect of the farming business. The uncertainties inherent in weather, yields,
prices, Government policies, global markets, and other factors that impact farming can cause
wide swings in farm income. Risk management involves choosing among alternatives that
reduce financial effects that can result from such uncertainties.
Five general types of risk are described here: production risk, price or market risk, financial risk,
institutional risk, and human or personal risk.
1. Production Risk
Production risk derives from the uncertain natural growth processes of crops and livestock.
Weather, disease, pests, and other factors affect both the quantity and quality of commodities
produced.
2. Price or Market Risk
Price or market risk refers to uncertainty about the prices producers will receive for commodities
or the prices they must pay for inputs. The nature of price risk varies significantly from
commodity to commodity.
3. Financial Risk
Financial risk results when the farm business borrows money and creates an obligation to repay
debt. Rising interest rates, the prospect of loans being called by lenders, and restricted credit
availability are also aspects of financial risk.
 4. Institutional Risk
Institutional risk results from uncertainties surrounding Government actions. Tax laws,
regulations for chemical use, rules for animal waste disposal, and the level of price or income
support payments are examples of government decisions that can have a major impact on the
farm business.
5. Human or Personal Risk
Human or personal risk refers to factors such as problems with human health or personal
relationships that can affect the farm business. Accidents, illness, death, and divorce are
examples of personal crises that can threaten a farm business.
Hence the term risk is used to describe the entire mechanism by which farmers make decisions
with respect to uncertain events. While uncertainty refers to the character of the economic
environment confronting peasant farm households, an environment, which will contain a wide
variety of uncertain events to which farmers, will attach various degrees of risk.
6.4. The Risk-Averse Farmer
6.4.1. Uncertainty and Farmers
There is a risk or uncertainty about the availability of the right inputs, in the required quantity at
the right time and place and at a reasonable price. If farmer assumed that demand and supply of
the resources are imbalanced in future, then the best way is to maintain stocks of inputs in
advance for future use. The main problems facing agriculture are usually land-related. Loss of
viable land, erosion, and other factors decrease the ability of farmers to use land. Other factors
include inflation and government restrictions. The pervasiveness of various kinds of uncertainty
like natural hazards, market failure, and improper state actions in peasant production has
important implications for its economic analysis and for the interpretation of its future prospects.
The propositions and arguments, which surround uncertainty, are:
1. It results in sub-optimum economic decisions at the micro economic level of the unit of
production [absence of profit maximization]
2. It results in unwillingness or slowness to adopt innovations [peasant conservatism]
3. It results in using various farming systems, like mixed cropping, which represent to
uncertainty.
4. Its impact is more severe for poor than for better-off farm households, implying that it
reinforces social differentiation.
 6.4.2. Types of Uncertainty
Uncertainty is a condition, which in varying degrees surrounds all forms of activity in a market
economy. It is considered more of a problem for agricultural production than for industrial
production due to the influence of climate and other natural factors on output, and the length of
the production cycle. The different types of uncertainty are:
1. Natural Hazards
Natural hazards brought unpredictable impact on output due to climate, pests and diseases, and
other natural calamities. Climate may affect the outcome of planting decisions at all stages [from
cultivation to harvest]. Combating pests and diseases depend on ability to purchase pesticides
and herbicides. This is also called yield or output uncertainty.
2. Market Fluctuations [Price Uncertainty]
The lag length between decision to plant crop or rear livestock and the achievements of outputs
lead to unknown market prices at the time of decision-making. It is assumed to be severe for
perennial crops. Lack of information and market imperfection are also sources for price
uncertainties.
3. Social Uncertainty
This is the major source to insecurity caused by differences in resource control, which lead to
peasant household dependence on devices like crop sharing and usury. This is due to unequal
ownership of land in peasant communities representing high level of uncertainty.
4. State Actions and War
Peasant economies as a whole are susceptible to decisions by state agencies and external donor
agencies (like IMF, World Bank, etc). Peasants are often caught up in guerilla wars, subjected to
expeditions by either side in an armed struggle. Above all, the insecurity of refugee will be
higher for peasant families who typically have very few social and legal rights in their countries
of adoption.
6.5. Analysis of Risk Behavior
Distance students, now you are clear with the definition of risk, which is central to the topic of
discussion. If so, then there are two distinct approaches to subjective probability associated with
the definition of risk. The first approach is to treat probability, and hence risk, as variance either
side of the expected average outcome of uncertain events. Therefore, risk in this approach is the
probability of events occurring which result in incomes above or below the average expected
income in a succession of crop seasons.
The second approach is to treat risk as the probability of disaster that is to mean the probability
that the variable outcome of certain events will take on a value less than some critical minimum
or disaster level. This is closer to the dictionary definition of risk than the former approach. For
the analysis of the impact of risk on the situation and behavior of poor peasant families, we stick
to this definition.
The implications of risk for the neoclassical model of farm production can be studied as follows.
Now distance students you are provided with three different response curves of output to a single
variable input, say units of purchased fertilizer. The response curves are in value terms; they are
total value product (TVP) curves, so that features of profit and loss are shown. The figure is
designed to explore the income variance approach to risk. Assuming that the risk situation, which
it describes, is one of uncertainty about the weather, there are only two events, which can occur:
1. The weather may be good (best crop yield)
2. The weather may be bad (poor crop yield)
  TVP1 = TP*P; TVP is the total value product response to increasing level of fertilizer
input in good year.
 TVP2 is the total value product response to increasing level of fertilizer input in bad year.
 Total Factor Cost (TFC) traces out the cumulative cost incurred as fertilizer use increases.
 E (TVP) The expected total value product given the farmer’s subjective views about the
likelihood of occurrence of good and bad seasons. In this example the farmer expects 3
years out of every 5 years to be good, and 2 years out of 5 years to be bad.
Hence,
P1 = Probability of good season = 3/5 = 0.6 = 60%
P2 = probability of bad season = 2/5 = 0.4 = 40%
E (TVP) = P1 (TVP1) + P2 (TVP2)
E (TVP) = 0.6 (TVP1) + 0.4 (TVP2)
The three alternative operating positions X 1, X2 and XE, each of which is allocatively rational
depending on the farmer’s subjective preferences with respect to risk can be further analyzed as:
A. Input use X1
Consistence with allocative efficiency on TVP 1, it occurs that the largest possible profit, aa 1 is
obtained. If TVP2 occurs a substantial loss, a1a2 is occurred. A farmer choosing to operate at this
position is described as risk-taking. He/She prefers to take the largest possible profit will come
[where aa1> a1a2]
B. Input use X2
Consistence with allocate efficiency on TVP2, the farmer makes a small profit, c1c2 is obtained.
If TVP1 occurs a profit, cc2 is obtained. A farm operating at this position is described as risk-
averse. She/he prefers to act as if the worse possible outcome will happen.
C. Input use XE
Consistence with allocative efficiency on balanced assessment of the average outcome of good
and bad seasons, if TVP1 occurs a profit, bb2, is obtained but this is not the largest possible profit
on TVP1. If TVP2 occurs a loss, b2b3, is occurred and this is not the smallest lose possible on
TVP2. A farmer choosing to operate here is described as risk-neutral.
The above analysis is based on income variance approach to risk. TVP 1 and TVP2 represent the
variation either side of the average response curve of output to input (fertilizer) and their position
on the graph is defined in terms of the level of subjective probability attached to each of them.
Risk aversion occurs here as a matter of personal choice between several alternatives. It is used
to illustrate the idea of risk aversion as a response to the problem of disaster. This response for
disaster avoidance is what
Lipton meant by the survival algorithm of peasant farmers. Lipton’s argument is that poor small
farmers are of necessity risk-averse. This can be justified, as the poor small farmers can’t afford
to cover their household needs from one season to the next since if they fail to do so they will
starve to death. In order to avoid disaster, the farmer must operate with input use in the vicinity
of x2, no other operating position will do.
The notion of disaster avoidance is sometimes referred to as the safety first principle. More
precisely it means that decision-making is constrained by the farmer’s unwillingness to risk
obtaining a net income below a given level unless the probability of it falling below that level is
very low indeed.
Economic rationality in the pure neoclassical sense demands that the farmer should operate at the
point where: E (MVP) = MFC [the expected MVP of input equals the price of the input]. This is
the profit maximizing position taking good years with bad over a season. A device called
decision tree analysis facilitates further understanding of decision theory. A simple decision tree
is set out and it contains example figures, which are compatible with the earlier analysis of a
production decision.
Decision tree analysis of a risky decision problem
The components of the decision theory approach can be interpreted to give somewhat broader
understanding on the basic terms as follows:
Act: This is the set of alternative actions between which a choice must be made.
 Apply fertilizer in full up to the recommended agronomic practice = act a 1 or, apply a token
amount of fertilizer = act a2. These are the discrete equivalents of courses of X1 and X2
States: these are uncertain events or states of nature, which may occur, and influence the
outcome of whatever decision is taken.
Good weather (S1)
Bad weather (S2)
 These are the same as the states underlying TVP1 and TVP2.
Probabilities: degrees of belief held likelihood of each state occurring.
 P1 and P2 are 0.6 and 0.4.
Outcome: The decision between two or more decisions (acts) leads to specific outcome (payoff)
Profit of birr 2000 – Good weather
Act a1 =
Loss of birr 375 – Bad weather
Profit of birr 1300 – Good weather
Act a2 =
Profit of birr 300– Bad weather

Solution procedures: the solution method for a decision tree problem begins from the right hand
side and works backward towards the decision node. The major steps that should be followed in
solution procedures are:
A) Calculating the EMV [expected money value] of the outcome of each node.
 Chance node A
0.6 x 2000 - 0.4 x 375 = 1050 EMV
 Chance node B
0.6 x 1300 + 0.4 x 300 = 900 EMV
B) Eliciting from the farmer the certainty equivalent (CE) net income which corresponds to the
risky outcomes of each act:
 The farmer will have a risk-averse CE for a1 of 850 birr because it is less than 1050 birr.
  The farmer will have a risk-neutral CE for a2 of 900 birr because it is equal to 900 birr.
C) Rejecting the alternative, which has the lower CE: in the above example act a 1 is eliminated
and the farmer would maximize utility by choosing act a2
In summary the outcome of risk-averse decision-making is different from profit maximization.
The profit-maximizing alternative in the above problem is act a 1 [Expected Money Value (EMV)
came as the result of the above calculation as 1050 birr], but risk aversion means that act a 2 is
chosen using certainty equivalent calculation. Act a 2, maximizes the utility of the farmer with
respect to uncertainty, it does not maximize profit.
Researchable themes in this topic
Distance students, upon analyzing the risk behavior of peasant families you may came across
some exceptional economic behavior than studied in the conventional principles of economics.
These topics or themes are subjected to some research undertakings. This research theme is
designed to discover whether and to what degree peasants are risk averse, the impact of risk on
farm efficiency and on agricultural growth, the major source of risk and many more. The
following are some of the research themes, which received due attention in analyzing the risk
behavior of peasants:
i) Peasants are risk-averse: Since it results from inefficient levels of resource use at the farm
level [Marginal Value Products (MVPs) exceeds factor price], then producing crops A, B,
C in descending order of output variability with a given resource leads to MVP A > MVPB
> MVPC rather than the equi-marginal returns.
ii) Peasant risk-aversion results in farming practices, such as spatial diversification of plots
and mixed cropping, which are designed to increase family food security rather than to
maximize profits. In other words, a trade-off is made between livelihood security and
economic efficiency.
iii) Peasant risk-aversion inhibits the diffusion and adoption of innovations, which could
improve the output, and incomes of peasant families. Peasant skepticism about
innovation is thought to be largely related to imperfect knowledge of innovations and the
agronomic practices appropriate to them and constraints to adoption such as high cost or
lack of credit.
iv) Risk aversion declines as wealth or income rises. Higher income or wealthier families are
better able to withstand the losses which might result from taking risky decisions. It
 follows that higher income farmers might be expected to be more efficient, more
prepared to specialize in cash crops, and more willing to innovate. Since these factors are
cumulative an implication is that the more uncertain the decision-making environment,
the more advantaged are better off farmers compared to poor ones and the greater the
likelihood of emerging and deepening inequalities between households.
6.6. Policy Implications of Risk
Alternative policy implications of risk-aversion may be grouped broadly in line with the
categories of hazard they are designed to overcome as follows:
1. Natural Hazards
1) Irrigation: is not only just for risk avoidance strategy; it also has a major impact on
output via its complementarity’s with multiple cropping, increased fertilizer use, and
improved seed. Large-scale irrigation schemes are unlikely to attract private
investment and hence better to involve in smaller scales manageable by households.
2) Crop Insurance
3) Establishing insurance scheme to save the times of disaster
4) Growing crops like sweet potato
5) Resistant Varieties
6) Plant breeding or selection designed for resistant to pests, diseases, and drought and
for stability of yields.
2. Market Risks
a. Price stabilization
b. State intervention ranging in setting minimum floor prices for key strategic staples to
fixed producer prices across a wide range of crops. Where crop yields remain highly
variable, price stabilization may serve to exacerbate rather than reduce income variance.
c. Marketing Information
d. Where risk-aversion is attributed to inadequate information [about prices, about new
seeds, etc.] then information provision is considered a useful component of risk policy.
e. Diffusion of information to peasants can take many forms through extension work,
training and visit programs, radio, leaflets, and farmer education in schools
f. Provision of credit for consumption is a means of reducing risk-aversion in farm
households subject to wide seasonal variations in income.
 g. Credit has also been considered relevant on the production side, for overcoming
resistance to the adoption of new technologies.
6.7. The Drudgery-Averse Farmer
6.7.1. Farmers as Consumers and Produces
Taking in to account the consumption side of peasant decision-making, a side of profit
maximization and risk aversion, Wolf observed that peasants run a household, not a business
concern. The dual character of peasant household as a family and enterprise, consumer and
producer leads to the interaction of consumption and production with in the household which
causes a unique form of decision making which sets peasants apart from any other kinds of
production unit under capitalism.
The special interest in this model is that to know the extent to which consumption decisions alter
the production responses of the household. Unlike that of profit maximizing and risk-averse
household theories [with only a single aim] in the full household theory the pursuit of various
different goals in consumption may result in unpredictable responses with different kinds of
economic/social change. Thus a major aim of such theory is to clarify as far as possible the links
between goals, actions, and the outcomes of such actions, and to construct a more accurate
representation of the multiple goals of the household.
6.7.2. The Chayanov Farm Household Model
The Chayanov (1966) peasant household model is a theory of household utility maximization. It
focuses on the subjective decision made by the household with respect to the amount of family
labor to commit to farm production in order to satisfy its consumption needs.
The subjective decision involves a trade-off between:
- The drudgery/irksomeness of farm work (disutility of work) and
- The income required meeting consumption of household (utility of income)
Or the household has two opposite objectives:
- Income objective (which require work on the farm household)
- Work avoidance objective (which conflicts with income generation)
Hence the theory is characterized as the theory of the drudgery-averse peasant.
6.8. Some Revisions on Economic Theories
In the theory of the firm, the entrepreneur buys his inputs, converts them into products and sold
them in the market. He produces and sells to the extent that his profit is maximized. On the other
hand, the consumer decided to purchase the combination of commodities that maximizes his
utility. In addition, the worker is assumed to choose a combination of work and leisure so as to
maximize his utility.

How is leisure and work defined?

- Asking relative - Going to

market

Days of work are unsatisfactory measure since the number of hours of work per day can vary.
Quantity of work depends on health, experience, etc. These assumptions underlying the
economic theories are incorrect when dealing with the typical peasant (African) farmer.
(i) Unlike the industrial worker he doesn’t hire labor by hour, day or week and expect
homogeneous amount of work/output.
(ii) Unlike the consumer he doesn’t have a regular income expected with high degree of
certainty.
(iii) The choice about the amount and kind of work done is determined by how much output
and income the farmer and his family want and how much time they want to devote to
other occupations [craft work, ceremony, visiting relatives, etc.]
Referring to the last paragraph, which is the basis of central discussion in this sub chapter (the
drudgery-averse peasant), major factor influencing the trade-off between how much output and
income to earn and how much time to spend on other occupation outside farm is the
demographic structure of the household [size, working/ nonworking, age, etc]. The demographic
structure of the household can be seen as the ratio of consumers to workers in the household or
simply as the c/w ratio where C stands for consumers and W stands for workers.
Example:
 If a household consists of just two couples with no children, its c/w ratio would be 2/2 = 1.
 If a household consists of two couples with an elderly parent and four children [assuming
two of the children make half an adult’s work contribution, then c/w = 7/3 = 2.33]
C = 2 adults + 1 parent + 4 child = 7
 W = 2 adults + 1 (4 children) = 3
Key assumptions of peasant household behavior model: -
a) No labor market; no hiring of labor (hiring in) nor wage work (hiring out) by family
members.
b) Farm output could be retained or sold in the market.
c) Flexible access to land for cultivation
d) Each peasant community has a social norm for the minimum acceptable consumption
level. Household motivation follows a social perception of the minimum acceptable level
of material income
The Model
The model contains both production and consumption aspects of household decision-making.
The production aspect is handled by a production function describing the response of output to
varying levels of labor input.
The production function notation is:
Y= Py * f(L); the function states that total income of the family is a function only of market
price of output and the labor input.

The consumption function is represented by a set of indifference curves describing given

amounts of total utility provided by alternative combinations of leisure and income.
The utility function notation is U = f(Y, H)
The utility or happiness of the peasant household is a function of
Output Utility income (Y) and leisure (H)

Minimum output

Max labor
Leisure measured

Labor measured

Now combining both the above two graphs, the Chayanov model of the farm household can be
depicted as:
MU of Y = 0
  Y min = minimum level of income acceptable for living with in the social system
 L max = the number of full working days physiologically feasible for worker
members of the household
 dy/dh = the subjective wage rate
The production function (TVP curve) displays the property of diminishing marginal returns to
labor. The indifference curves are convex towards the origin at L. Any point on an income-
leisure indifference curve, B on I2, describes the subjective value placed by the household on
work at that point. The slope of the curve, at B, describes the amount of income, dy, which the
household would need to gain in order to compensate for the loss of one unit of leisure dH. In
other words, it is the household’s subjective wage level.

Ymin gives the farm household’s minimum acceptable standard of living and Lmax gives the
maximum number of full working days, which it is physiologically feasible for worker members
of the household. The existence of these constraints affects the shape of the indifference curves
at the extremes: -
a) At the left bottom, Indifference curve (IC) becomes horizontal to mean that marginal utility
(MU) of leisure becomes zero. At this particular point no amount of leisure could
compensate for a fall in income below this level.
b) At the right top, IC becomes vertical to mean that the marginal utility of income tends to
zero. No amount of income could compensate for a fall in leisure at the maximum labor
constraint is approached.
The equilibrium position of the farm household is given by the point of tangency of the
production function to the highest possible IC of utility, at point A, with labor input L e and
income level Ye. At this point the MVPL equals the subjective value of family labor time
(dY/dH), i.e. the amount of income required to compensate for the loss of one unit of leisure.
Therefore, the way the economic problem of the peasant household formulation in the Chayanov
model can be simply put as: -
Maximization of utility subject to production function, minimum acceptable income level,
maximum number of working days available
In notation form, it can be written as:
Max U = f (Y, H)
subject to
Y=PY * f(L); Y ≥ Ymin; L ≤ Lmax
Assuming that the production function (rather than one of the other constraints), which is
binding, the solution to the above problem occurs where the MRS of leisure for income (the
subjective wage) equals the MVPL.
MUH = dY = MVPL
MUY dH
The demographic character of the model is emphasized on the impact on equilibrium output and
labor use of a change in the production function.
The production function may change due to: -
a) Changes in other resources, which combine with labor to produce output.
b) A change in the technology of production
c) A change in the market price of output
The increase/improvement in these changes will shift the family income curve upwards, and thus
place the household on a higher IC than before. The impact of factors of family size and
composition on the slope and position of indifference curve are described as:
(i) The household grows in size as children are born, raising the minimum consumption level
and c/w when children are small and their work contribute low.
(ii) Children grow up and contribute increasingly to the work of the household, causing the c/w
ratio to fall from its peak to mean that the number of person-days of labor available to the
household rises.
(iii) Adult children begin to form families, and farms, on their own, thus reducing the family
size, lowering the minimum consumption level, and reverting eventually towards the
original demographic structure of the household.
These changes describe the demographic cycle of the peasant farm household, which is a central
feature of the theory of peasant economy.
As an example, let us look on changes on (i) impacts of higher C/W and minimum consumption
level
 I1
I2

The following are the comparisons with the previous equilibrium: -

(a) The number of workers and TVP curve stay the same
(b) The minimum consumption constraint is raised from Y1min to Y2min, reflecting the
increased consumption needs of the larger family.
(c) The shape and position of the income leisure IC changes. The curve has a shallower slope
because the marginal utility of income has increased and the marginal utility of leisure has
decreased for all points on the curve.
The preferences of the households change due to the need to feed a larger family. The household
is prepared to accept a smaller rise in income (dY) in order to compensate for the loss of one unit
of leisure (dH) than before. There is a fall in the subjective wage.
Dear student, when we wind up our discussion on the drudgery nature of peasant households,
especially with respect to the poor African case, the key elements which needs due attention in
this theory are:
- The size of the peasant family
- The C/w ratio
- The absolute number of workers in the family
 - The social norm of a minimum acceptable because standard of living
These elements lead to a distinctive type of economic calculation on the part of peasants –
equating the MVPL to the subjective wage, which is, different from that followed by capitalist
enterprise. In essence the model is a demographic explanation of household motivation, which
yields the following testable propositions:
a) A new equilibrium is established at higher output Y 2e and labor input L2e than before. The
capacity of the farm household to intensify labor use by lowering the subjective wage -
Chayanov terms the capacity of farm household for “self-exploitation.” Self-exploitation
versus exploitation of labor by capital in the capitalist enterprise has distinct meanings. To
conclude, the Chayanov model sets up a theory of the peasant household containing both
consumption and production components.
b) The marginal and average products of labor should vary significantly between households
according to their demographic structure. This emphasis on variation in labor efficiency
contrasts with the profit-maximizing hypothesis where the focus of empirical work was on
average efficiency, not on variation and its explanation.
c) The size of the area sown should vary directly with family size.
d) The lower the c/w ratio, the higher the average income per person in household. This is
because low c/w ratio means a higher subjective wage, placing the family in a position on the
production function with high marginal returns to labor.
Chapter Summery
 The uncertainties inherent in weather, yields, prices, Government policies, global
markets, and other factors that impact farming can cause wide swings in farm income.
 Uncertainty is a condition, which in varying degrees surrounds all forms of activity in a
market economy.
 Risk management involves choosing among alternatives that reduce financial effects that
can result from such uncertainties.
 Discounting for risk implies that the farmer produces less than the optimum output level
on average in order to reduce losses in unfavorable seasons.
 Risk measures the uncertainty that an investor is willing to take to realize a gain from an
investment.
 Risk is an important aspect of the farming business. The uncertainties inherent in
weather, yields, prices, Government policies, global markets, and other factors that
impact farming can cause wide swings in farm income.
 The main problems facing agriculture are usually land-related. Loss of viable land,
erosion, and other factors decrease the ability of farmers to use land.


Review Question
1. How do you manage risk in uncertainty in agriculture?
2. What are uncertainties in agriculture?
3. What is uncertainty in farming?
4. What are the reasons for uncertainties faced by farmer?
5. How can we overcome uncertainty in agriculture?
 CHAPTER SEVEN
7. GLOBAL ISSUES IN AGRICULTURE
7.1. Introduction
Globalization has allowed agricultural production to grow much faster than in the past. A few
decades ago fast growth was somewhat over 3 percent per year. Now it is 4 to 6 percent.
However, these higher rates of growth involve a substantial change in its composition. There are
an estimated 570 million farms worldwide today, and millions of other people work in food-
related jobs. The global food system also has a large environmental footprint. In fact, agriculture
occupies nearly 40% of the earth’s surface, far more than any other human activity.
In this unit, a detailed account of the global issues affecting agriculture will be discussed.
Policies of the agricultural sector in developed countries negatively affect the agricultural sector
of LDCs. These policies shall be the focus of the current unit.
Chapter Objectives
After reading this chapter students will be able to:
 Understand agricultural policies of the developed nations
 Understand how these policies affect the of agricultural sector of the developing nations
 Understand international trade in agriculture
 Understand global issues of concern
7.2. Global Issues in Agriculture
Many environmental issues affect whether farmers have a good year or not. Soil quality, water
quality, climate, and terrain are just a few of the environmental issues that may impact profits
and productivity for farmers in any given growing season. The farming systems are facing
constraints such as small land size, lack of resources, and increasing degradation of soil quality
that hamper sustainable crop production and food security. The effects of climate change (e.g.,
frequent occurrence of extreme weather events) exacerbate these problems.
Agriculture impacts society in many ways, including: supporting livelihoods through food,
habitat, and jobs; providing raw materials for food and other products; and building strong
economies through trade. As 2021 ends, we take a retrospective look at five topics that were
covered in our analytical work this year. These issues represent just a fragment of the Bank's
work, but they are key to reducing poverty and hunger while slowing climate change
Food Security
Approximately 30 percent of the world’s population lacked access to adequate food in 2020 and
into 2021. The World Bank took action to fight food insecurity around the world, providing
immediate aid to vulnerable households and more long-term support to farmers in the form of
seeds, fertilizer, and other agricultural inputs. COVID-19 also pushed more people into poverty
and made the poor poorer around the world. This, along with supply chain interruptions and
rising prices had a major impact on hunger. To learn more about these impacts, read this brief
compiled by the Bank and updated at least once a month.
Farming Insects for Food and Feed
This December, the Bank released a ground-breaking report looking at the valuable role farming
insects can play in both food security and climate-smart agriculture, Insect and Hydroponic
Farming in Africa: The New Circular Food Economy. While two billion people regularly eat
insects harvested in the wild, farming them for food at scale is new. The report found that
African insect farming could generate crude protein worth up to US$2.6 billion and bio
fertilizers worth up to US$19.4 billion. That is enough protein meal to meet up to 14% of the
crude protein needed to rear all the pigs, goats, fish, and chickens in Africa.
 Key benefits of insect farming include:
 Insects can be farmed without arable land.
 Insects can be grown within a couple of weeks.
  The food they need to grow comes from food waste.
 Insect waste can be used as fertilizer.
Insects can be used as animal feed, cutting farmer expenses, and reducing greenhouse gases
generated from farming and transporting other feed such as soybeans. People can eat insects or
sell them for income, increasing food security. For more on farming insects and the role they can
play in the food system, take a listen to this episode of the Table for 10 Billion podcast.
Fixing Food Finance to Build a Greener Future
While agriculture currently accounts for about 25% of greenhouse gas emissions, it also offers
opportunities to both fight climate change and feed more people as the world’s population grows
to 10 billion people by 2050. One of the keys will be changing the way agriculture is financed
and incentivized.
A report from the Bank, published in September, explains the US$12 trillion in annual hidden
social, economic, and environmental costs generated by our current food system and offers
recommendations to break the cycle by implementing five food finance imperatives that will
help implement climate-smart agriculture.
The report, Food Finance Architecture: Financing a Healthy, Equitable and Sustainable Food
System, was written in conjunction with the Food and Land Use Coalition, and the International
Food Policy Research Institute, and released to coincide with the UN Food Systems Summit. A
feature story and episode of the board for 10 Billion podcast examine transforming the food
system to adapt to climate change.
Digital Agriculture and the Path to the Future
Agriculture continued its march to the digital future in 2021, both with new techniques being
developed for growing food and technology that better links the world’s 570 million farmers and
8 billion consumers. In March, the Bank released the report What’s Cooking: Digital
Transformation of the Agro-food System, which explores how digital technologies are improving
the food system and provides a roadmap for countries to scale up their own digital agriculture.
The report also provides a framework to evaluate policy proposals that can make the food system
more efficient, equitable, and environmentally sustainable. A live event was held in conjunction
with the report’s release and the Table for 10 Billion podcast also looked forward to the digital
future of food.
Feeding Growing Cities
In March, the Bank looked at the fast-growing cities of Asia and how they have integrated food
systems into their planning. The resulting report, RICH Food, Smart City, demonstrated that
more needs to be done at the planning stages to ensure a plentiful and safe supply of food to
residents now and in the future. Only 8% of the 170 emerging Asian cities surveyed by the Bank
and FAO were deemed to be “food-smart” working proactively to ensure strong food systems.
7.3. Agricultural Policies of the Industrialized Countries and Their Impacts on LDCs
In the initial unit, the differences between the conditions of agriculture in the industrialized
countries and agriculture in the developing countries have been mentioned. One of the
differences is the problem of overproduction (excess supply) in the industrialized nations and the
problem of food shortage (excess demand) in LDCs.
The developed countries experience a regularly outward moving supply curve due to progress in
agricultural science and technology and their farmers face the problem of adequate market for
their products. The policy measures the developed countries take in order to help their farmers
out of this problem hurt the developing nations.
Given that the demand for agricultural products is highly price inelastic, the excess supply of
agricultural products in the North, with the implied downward pressure on prices, reduces their
farmers’ income if left to the market forces. That is, where a fall in price (P) induces a less than
proportionate rise in quantity demanded (Q), the total revenue (income) of farmers (P.Q)
definitely falls. This is known as ‘The Farm Income Problem’. Consequently, the major focus of
their policies is how to solve this farm income problem how to find markets for their products.
Where is the origin of the farm income problem? In other words, why does the commodity ToT
move against agricultural products? Or why is there a problem of excess supply? The farm
income problem emanates from two sides: the demand and the supply sides.
On the supply side, as agricultural productivity grows faster than that of other sectors, the prices
of agricultural commodities tend to fall faster. In addition, the immobility of resources from
agriculture to other sectors (land and investments on land capital) entails a problem of
overinvestment in agriculture.
On the demand side, the demand for agricultural products is highly income-inelastic particularly
in the industrialized countries. Besides, there is very low (or no) growth in the size of population
 in these countries. Thus, demand is also a limiting factor in the domestic markets of the
industrialized countries. How do farmers respond to this farm income problem?
The rigidities in the discussion above rule out the economic space for these farmers they are not
able to increase demand or reduce supply. Hence, they respond in the political arena. They are
well-organized (in farmers’ unions) and influential to compel their governments to develop
favourable policies. What are these policies? The following diagram gives an overview of the
policies designed by governments of the North to support their farmers in solving the farm
income problem.
An Overview of Agricultural Policies of Developed Countries

Policy

Domestic External

Supply Demand Export Import Import “Food Others

Subsidy Duties Quota Aid”
Side Side

Price Acreage Food School Others

Support Stump Lunch
Withdrawal

7.3.1. The Domestic Policies of ICs

These policy measures try to cure the symptoms (farm income problems) rather than the real
problem (overinvestment in agriculture). Now, let us explain each of the policies in the above
diagram in turn. The domestic supply side policies include price support and acreage (land)
withdrawal. The price support policy involves money transfer from government treasury to
farmers. The following figure helps us make this point clear.
 P
S

B G
A
E C F
PG
D
D’ = DC + DG

DC
O QD Q* QS Q

Given the consumers’ market demand (D C) and the market supply (S), free market equilibrium
price would be PF. If farmers complain PF and effectively urge their government for a higher
price (PG), as the farmers produce QS at this price and can only sell Q D, there would be an excess
supply of QS – QD. So, what the government can do is to purchase (create an artificial demand
for) the excess supply. This artificial demand created by the government (D G) shifts the demand
curve to D’.
As a result, the consumers face a welfare loss of the amount given by area (A + B), i.e., change
in consumers’ surplus = – (A + B). From selling Q D units to consumers, producers capture area
(A) of the loss in consumers’ surplus but they lose area (D) of their previous surplus, i.e., change
in producers’ surplus = (A – D). Thus, the net loss so far is – (B + D). This net loss, – (B + D),
indicates the inefficiency brought about to the system. However, this is not the whole story.
The government spends (due to the artificial demand it creates) the amount given by (Q S –
QD).PG = area (B + C + D + E + F + G) for purchasing the excess supply of (Q S – QD) at the unit
price of PG. Of this government expenditure, area (E + F + G) covers the producers’ cost of
production while area (B + C + D) represents a net transfer from the government (ultimately
from tax payers) to the producers. To sum up, area (E + F + G) is used as a cost of expanding
production though unnecessary expansion, area (B + C + D) represents a net transfer, and thus
the deadweight loss shown in this picture is area (B + D).
An additional loss in welfare that is not apparent from the figure is the cost of storing the amount
the government purchases. This is, again, a burden born by the tax payers. The second domestic
policy instrument on the supply side is controlling the level of production by keeping portions of
farm land idle through providing incentives (subsidies) to farmers. This instrument – the
government paying a great deal of money for farmers to keep their land idle – is a common
policy instrument in USA. Where most of this benefit goes to big farmers, tax payers are the
ultimate bearers of the burden.
The above domestic supply side policies have never solved the farm income problem. Hence,
demand side policies are also tried: food is provided to the unemployed (food stump) and to
school children from poor families (free lunch), and/or new use values of crops are created, for
instance, cooking oils and drugs are produced from food crops.
7.3.2. External Policies of ICs
As both the supply and demand side domestic policies are inadequate to solve the problem of
their farmers, governments of the developed world exercise external policies which affect
international trade in agricultural commodities. With an objective of promoting exports and/or
restricting imports and with consequences both on other (external) and their domestic economies,
these governments use policy measures like import quota, import tariff, export subsidies, “food
aid”, and dumping. While import quota and export subsidy are very common in USA, import
duties are commonly practiced by the European Union.
7.3.3. Import Quota
An import quota is a type of trade restriction that sets a physical limit on the quantity of a good
that can be imported into a country in a given period of time. Quotas, like other trade restrictions,
are typically used to benefit the producers of a good in that economy (protectionism). The United
States has usually been using import quota particularly in protecting its sugar producers.
P
S

S+Q

P2 J L
ESW

P1 0 S0 S1 D1 D0 Q
In the above figure, imports under free trade equal D 0 – S0, the difference between domestic
consumption and production. Suppose the government introduces an import quota equal to D 1 –
S1. If the price in the importing country is less than the world price P 1, then there will be no
imports. But as soon as it rises to P1, foreign producers will be willing to supply the market. The
aggregate supply curve facing the domestic consumers will thus follow the domestic curve (S)
for prices below P1; will follow the world excess supply curve (ESw) at price P 1 until the quota
limit is reached; and it then follows the line S + Q (parallel to S) for prices above P1.
The market in the importing country will then clear at price P 2, and imports will be D1 – S1, equal
to the quota. There will be a loss in consumers’ surplus (= area J + K + L + N + M); and, a gain
in producers’ surplus of area J. The net loss is area (K + L + N + M). Sugar producing LDCs
have suffered a lot because of such import restrictions by quota and continue to lose a huge
amount of foreign exchange because of the inefficient production of sugar by the United States
alone.
7.3.4. Import Levy
Import levy is another instrument the developed countries use to protect their farmers. Import
levies are very commonly practiced in the European Union. The following figure illuminates the
effect of import levy in the domestic economy of the imposing country.

P2 G J H
Sw + T

a b c d
P1 A C X N B

Sw
D

O Q
D is the domestic demand curve for and S the domestic supply curve of an agricultural
commodity in a developed country. In the absence of trade, the intersection of D and S defines
equilibrium point E. With free trade at the world price of P 1, the domestic demand is greater than
its supply by the amount CB, which is equal to its import. The horizontal dashed line S w
represents the infinitely elastic free trade world supply curve of the agricultural commodity to the
country.
As the developed country imposes an import levy/tariff on the imports of the commodity
considered, price will rise to P2. The horizontal line Sw + T represents the new (tariff inclusive)
foreign/world supply curve to the nation. The nation will consume an amount equal to GH, of
which GJ is produced domestically and the remainder JH is imported. Thus, domestic
consumption declines by the amount BN; domestic production expands by CX; imports decline
by (BN + CX); and, revenue collected by the government equals area XJHN.
Using the concepts and measurements of producers’ surplus (PS), consumers’ surplus (CS), and
government revenue (GR), we can measure the domestic costs and benefits of the import tariff as
follows. The import levy reduces CS by AGHB = areas (a + b + c + d). Of this, XJHN = area (c)
is collected by the government as tariff revenue, AGJC = area (a) is redistributed to domestic
producers of the commodity in the form of increased rent or PS, while CJX + BHN = areas (b +
d) represent the protection cost, or the deadweight loss, to the economy.
The production component (CJX = area (b)) of the deadweight loss arises because with tariff,
some domestic resources are transferred from the more efficient production of some other
(exportable) commodity to the less efficient production of this commodity. The consumption
component (BHN = area (d)) of the protection cost, or the deadweight loss, arises because the
tariff artificially increases domestic price above the market price and distorts the pattern of
consumption within the country. The implication of this for the LDCs is that net exporters of the
commodities under such protection would have narrow markets for their products and thus lose
foreign exchange.
 7.3.5. Export Subsidy
Consider the figure below. P

0 D1 D0 S0 S1 Q
D
P1
J K L M

P2

S
Under free trade the price prevailing in the country would be the world price, P 1. A quantity S0
will be produced, of which only D0 will be consumed domestically, the remainder being
exported. If an export subsidy is paid to the exporters, then the domestic price will be driven up
to P2 since domestic producers will be receiving that price inclusive of the subsidy for exports.
Domestic consumption will fall to D1, domestic production will increase to S 1, and so exports
will expand from S0 – D0 to S1 – D1.
The loss in consumers’ surplus from the policy will be given by areas J and K; the gain in
producers’ surplus by areas J, K and L, so that gains to producers exceed losses to consumers.
However, the subsidy will cost taxpayers an amount equal to the sum of areas K, L and M, so
that overall there will be loss to the economy of area (K + M): area K (a consumption loss) and
area M (a production loss). The loss would have been larger if this country were initially
assumed a net importer of the commodity. This practice commonly used by the United States has
implications for LDCs, which are similar to the other instruments of protection discussed earlier.
In food policy, this means of surplus disposal for developed countries, while possibly reduces
LDCs’ food shortage in the short run, has the following adverse effects on the developing
countries:
  Producers’ prices are hurt as they face price disincentives;
 Consumers may develop a new consumption habit and dependence on products not
produced domestically;
 Developing aid-dependency syndrome like underreporting income to get aid by
individuals and discouraged effort for tax collection on the side of governments;
 Importation of weeds along with food aid, etc.
7.4. The Profile of Agricultural Protection in the Developed Countries
One of the many economic differences between developed and developing countries is that
developed countries subsidize farmers while developing countries tax farmers. But what do
agricultural subsidies in Canada, Japan, the US or the European Union (EU) has to do with
Africa? Everything! Developed countries subsidize their farmers at a rate of about $250 billion a
year, 25 times more than the annual amount the UN estimates as needed to combat HIV/AIDS
worldwide. Subsidies influence world prices, since they encourage farmers in developed
countries to export more agricultural products than they would otherwise. Therefore, agricultural
policies in developed countries should be of great interest to Africa and the rest of the world.
Agriculture has been and in the foreseeable future will continue to be the backbone of Sub-
Saharan Africa's economy. The sector employs about 70 per cent of the labour force. Agriculture
is the main generator of export revenue in the region. Agricultural subsidies in developed
countries reduce world prices, and thus the incomes of African farmers. World Bank studies
suggest that US subsidies alone reduce West Africa's annual revenue from cotton exports by
$250 million a year. The EU also heavily subsidizes its farmers. The EU, which by the dictates
of comparative advantage would be a net importer of many agricultural products, is the second
largest exporter (after the US) of agricultural produce.
In 1993, during the last days of the General Agreement on Tariffs and Trade (GATT), the
predecessor of the World Trade Organization (WTO), an agreement was reached requiring
developed countries to reduce agricultural subsidies. However, even at the time of the agreement,
it was clear that it had many loopholes and that only modest reductions in subsidies could be
expected. Worse still, countries were left with broad discretion that allowed them to increase
subsidies on "sensitive" commodities. In practice, this refers to those commodities whose
producers have strong political clout.
In May 2002, US President George Bush signed a farm bill that would increase subsidies by $83
billion over a period of 10 years. This will raise subsidies to cotton growers by more than 60 per
cent. Therefore, other things being equal, cotton producers in East and West Africa and other
developing areas should not expect the world price of cotton to go up anytime soon. It is possible
that the damage caused by agricultural subsidies in the US to African countries exceeds even the
benefits that might come from the African Growth and Opportunity Act (AGOA) that gives
African products preferential access to the US market.
African countries must continue to challenge the US and other developed countries to reduce
agricultural subsidies. Agricultural subsidies in developed countries may seem good to importers
of food. But in reality, some of those countries are food importers in part because of the
subsidies. African countries must remember that higher world prices of agricultural products
would encourage their own farmers to produce more, with the potential for their countries to
become exporters of food. With that in mind, African countries must also continue to reduce
domestic taxes on farmers.
Much attention has been given to reducing the negative impacts of developed country policies on
developing countries particularly through efforts to open markets and to remove developed
country subsidy policies that have induced production and depressed world prices. Rising
agricultural protection in developed countries and concerns about its impact on poorer
developing countries spurred international efforts in the 1980s to reduce distorted prices in world
markets. At the start of the Uruguay Round of trade negotiations in 1986, some agricultural
exporting countries formed the Cairns Group and ensured that members of the General
Agreement on Tariffs and Trade put agricultural trade and subsidy reform high on the Uruguay
Round agenda. Developing countries also formed the G-20 group at the time of the Cancun
Ministerial conference in the Doha Round in 2003 to secure reductions in developed country
protection.
Member countries of the Organisation for Economic Co-operation and Development (OECD) are
reforming their agricultural policies, but progress is slow. The average support to agricultural
producers fell from 37 percent of the gross value of farm receipts in 1986-88 (the beginning of
the Uruguay Round) to 30 percent in 2003-05. This estimate, referred to as the producer support
estimate (PSE), measures the annual monetary value of gross transfers from consumers and
taxpayers to agricultural producers, measured at the farm-gate level as a share of the gross value
of farm receipts. It arises from policy measures that support agriculture, regardless of their
nature, objectives, or impacts on farm production or income. While the 7-percentage-point
decline in support is progress, the amount of support increased over the same period from $242
billion a year to $273 billion.
More than 90 percent of the dollar value of agricultural support in OECD countries is provided
by the European Union (which alone provides about half); Japan; the United States; and the
Republic of Korea. In all four, the PSE remains high. In contrast, two OECD countries Australia
and New Zealand provide little support to their farmers.
OECD countries have increased preferential access to their markets for some developing
countries. For example, in 2000, the United States signed the AGOA, which offers preferential
access to Africa’s products in U.S. markets. The EU continues to provide extensive
nonreciprocal preferential market access to countries in Sub-Saharan Africa, the Caribbean, and
the Pacific under the Cotonou Agreement. In 2001 the EU also provided duty-free and quota-free
access to its markets to UN-designated Least Developed Countries for “Everything but Arms,”
although it excluded services and delayed opening sensitive markets for bananas, rice, and sugar.
Price support to farmers in OECD countries creates incentives to produce more. The recent shift
to separate or decouple support from the type, volume, and price of products is an effort to
reduce the trade-distorting effects on current or future production while maintaining support to
farmers. Twenty-eight percent of the PSE in 2003-05 was decoupled from production and input
use, up from 9 percent in 1986-88.
Decoupled payments are less distorting than output-linked forms of support such as tariff
protection, but they can still influence production. They can reduce farmers’ aversion to risk
(wealth effect) and reduce the variability in farm income (insurance effect). Banks often make
loans to farmers that they would not make to other borrowers, keeping farmers in agriculture.
Most programs of decoupled payments have no time limit, as in the EU and Turkey. The United
States had a program with a time limit in the 1996 Farm Bill, but it was not enforced. Mexico’s
decoupled program initially had a time limit; the program was supposed to expire when the
North American Free Trade Agreement phases in is completed in 2008, but the government has
already announced that the program will be retained in some form. Unless these programs have
time limits with credible government commitments to stick to them, decoupled payments risk
becoming more distorting and costly than commonly assumed. In addition, continuing output
linked programs alongside decoupled support can significantly dampen the less distorting effects
of decoupled programs.
Progress on decoupling has varied significantly by commodity, with most progress on grains –
although recent initiatives to expand the use of bio-fuels in OECD countries may indirectly
reverse some of this progress. Needed now is a rapid shift to less-distorting decoupled support
for export products important to developing countries, particularly cotton. There have been some
recent changes to rice, sugar, and cotton policies in Japan, the EU, and the United States,
respectively, all at an early stage of implementation.
However, political economy factors in each country have determined the pace and extent of
reforms. U.S. cotton policies, EU sugar policies, and Japan rice policies indicate that the impact
of WTO in inducing reform is real and that media pressure can complement it. The cases show
that reforms are not easy and often require bargained compromises and compensation schemes
for the losers to get agreement on further reducing high levels of agricultural protection (as in the
Japanese rice policy reforms and the EU sugar policy reforms).
7.5. World Trade in Agricultural Commodities
7.5.1. Globalization
The beginning of globalization could be traced back to ancient times of trans-national trade
practices. As far as Africa is concerned, the 16 th century slave trade (where labour “black-gold”
crossed boundaries) and the 19th century direct colonialism (where huge transfer of material
resources to the West took place and African labour was exploited within Africa) could be
considered as the earlier manifestations of globalization. Shrinking space and time due to
progress in information and communication technology (ICT) and disappearing borders are the
distinguishing features of globalization in its present era.
Globalization is a broad concept casually used to describe a variety of phenomena that reflect
increased economic interdependence of countries. Such phenomena include flows of goods and
services across borders, reductions in policy and transport barriers to trade, international capital
flows, multinational activities, foreign direct investment, outsourcing, increased exposure to
exchange rate volatility, and immigration. These movements of goods, services, capital, firms,
and people are believed to contribute to the spread of technology, knowledge, culture and
information across borders.
Right after the World War II, the world has witnessed a spread of markets and multilateral
development from which no country can operate independently. The most visible features of
globalization have been the massive increases in international trade flows and investments
particularly since the late 1980s.
The current phase of globalization is induced by a quantum jump in the incidence of technical
progress, organizational innovations such as flexible production systems and the new
information and telecommunications technologies, enhanced efficiency in supply chain logistics
and enabled functional integration of trans-national strategies of production, marketing,
outsourcing and increased intra-firm trade. These forces of globalization enabled even small
farms to participate effectively in international specialization. This multi-dimensional process,
globalization, has different impacts on different countries, depending on the level of economic
development and political influence, and it has both positive and negative consequences for
human development.
By bringing information to buyers and sellers worldwide, information technology has also
contributed to the globalization of demand and as a consequence it has led to the globalization of
competition. But, it has been evident that industries linked to information technology were more
able to take advantage of such global market opportunities.
As the determinants of competitiveness change rapidly, the process of industrialization in general
and of export-led industrial growth in particular is driven not by resource endowment but by
knowledge and skills. Empirical evidence lending credence to a close correlation between
economic growth and export expansion shows that the fast growth economies are those, which
have positioned themselves as favourable business partners, investment friendly locations, and
which have expanded exports rapidly. Of particular importance is a country’s ability to export
processed or l; high-value products.
In the emerging knowledge-intensive and skill-intensive global markets, a country’s or region’s
share of manufactured exports is a measure of its access to learning and technology. Given the
rapid pace of globalization, the external economic environment presents major challenges as well
as opportunities for agriculture in the LDCs. While access to larger and more affluent markets
favours growth and development through trade, the LDCs face many internal supply-side
constraints, associated with their economic underdevelopment, which render their exports
uncompetitive. In addition, competitive markets may be the best guarantee of efficiency, but not
necessarily of equity. When the market goes too far in dominating social and political outcomes,
the opportunities and rewards of globalization spread unequally and inequitably – concentrating
power and wealth in a select group of people, nations and corporations, marginalizing the others.
While most other regions have derived significant benefits from the growth in trade and
investment, thus fuelling their structural transformation, Africa (particularly Sub-Saharan Africa)
has been bypassed and further marginalized within the world economy as its shares of world
trade, investment and output have declined to negligible proportions. With inadequate
infrastructure and high transactions costs, Sub-Saharan Africa has not benefited from the
production relocation or trade induced by the information technology revolution and the new
imperatives that determine the degree of productivity growth and competitiveness.
Unlike the commodity agriculture of the past where competitiveness was in terms of cost, the
variables of competitiveness in the new agriculture include quality features and responsiveness
(or time to market) as well as cost. High transport costs have had a significant negative impact on
African exports and the location of manufacturing activity. Freight rates for African exports are
sometimes 20 percent higher than those faced by the region’s competitors. For some exports in
which Africa has a potential competitive advantage (clothing, textiles and footwear),
transportation costs range between 15 percent and 20 percent.
Since 1980, services have been the fastest growing (faster than GDP) sector in the African
economy, agriculture too grew marginally faster than GDP, but industry lagged well behind.
Manufacturing industry’s relatively poor performance is a reflection both of the sluggish growth
in agriculture, which has limited the flow of raw materials to industry for processing and
relatively weak domestic and export demand for African manufactures. Unlike the shift of
importance to the service sector of most developed countries, the sectorial shift in Africa is
unhealthy. There has not been significant technological progress or productivity increases in
agriculture to compensate for employment shifts to the industrial or services sectors.
7.6. Several Factors Explain This Anomalous Structural Shift In Africa.
First, low technological capability and competitiveness has led to slower growth in productivity
in Sub-Saharan Africa than any other region. In part this reflects the business environment at
large, including poor infrastructure, the scarcity of skills and low levels of foreign direct
investment. The consequence is a backward industrial sector, often operating with obsolete plant
and equipment and substantial spare capacity, resulting in higher unit costs than other LDCs
(Asia or Latin America).
Second, small domestic and regional markets and low levels on intra-regional trade and exports
of manufactured goods mean that few enterprises are able to exploit scale economies, again
giving rise to high unit costs. Hence Sub-Saharan Africa manufacturers are frequently at a
competitive disadvantage relative to imports in domestic markets as well as in export markets.
Third, the declining share of industry also reflect the interplay of the impact of economic reforms
and trade liberalization, trade effects arising from loss of market share for manufactured
products, and restructuring, including privatization, also led to some temporary decline in
industrial output.
In the face of rapid globalization with opportunities and threats, the challenge of Sub-Saharan
Africa is how to manage globalization in order to reap the benefits while minimizing the
negative impacts. For developing countries as a whole the challenge is to find the rules and
institutions for stronger governance – local, national, regional and global – to preserve the
advantages of global markets and competition, but also to provide enough space for human,
community and environmental resources to ensure that globalization works for people and not
just for profits.
In other words, the challenge lies in a search for markets and profits tempered by social
responsibility “globalization with ethics, equity, inclusion, human security, sustainability and
development”. An assessment of winners and losers in the face of globalization should be in
terms of social impact. If millions of people are the real losers, forces of globalization will fail to
constitute the root of development, i.e. there will be growth without development.
7.7. World Trade Institutions and Trade in Agricultural Commodities
Attempts were first made in the 1930s to coordinate international trade policy. At first, countries
negotiated bilateral treaties. Later, following World War II, international organizations were
established to promote trade by, for example, liberalizing tariff and non-tariff trade barriers. The
General Agreement on Tariffs and Trade, or GATT, signed in 1947, was the first such agreement
designed to remove or loosen barriers to free trade. The specific objectives of GATT were:
 To provide framework for the conduct of trade relations among nations,
 To promote progressive elimination of trade barriers, and
  To provide a set of rules (code of conduct) that will inhibit countries from taking
unilateral actions.
GATT was founded on three basic principles:
1. Non-discrimination. Member nations were bound by the treaty's most-favored-nation clause,
which required members to treat all other contracting parties equally. Once a member reduced
a tariff for another member country, that reduction applied to all member countries. However,
an escape clause allowed a nation to withdraw its tariff reduction if it seriously harmed the
country's domestic producers.
2. Elimination of non-tariff trade barriers (such as quotas), except for nations in balance of
payments difficulties.
3. Consultation among nations in solving trade disputes within the GATT framework.
GATT members held eight specially organized rounds of negotiations that significantly reduced
tariffs and other restrictions on world trade. In general (in almost all of these negotiations), there
were many loopholes and exceptions to the principles on which GATT relied. The major ones
are:
1. The elimination of non-tariff trade barriers excluded agricultural products and textile
which are the export items of most LDCs. As such, GATT was designed to liberalize the
industrial sector except textile, or generally, to help the interests of the West.
2. There was an escape clause which allowed the withdrawal of any negotiated tariff
reduction whenever any domestic industry claimed injury from imports. A rising share of
imports in an industry was sufficient to “prove” injury.
3. The national security clause prevented tariff reductions (even if already negotiated) when
they would hurt industries important for national defense.
The last two are particularly relevant for USA. Since meaningful tariff reductions necessarily
hurt some industries (those in which the nation has a comparative disadvantage), these loopholes,
especially the escape clause, represented a serious obstacle to greater tariff reductions.
As GATT was generally skewed to fulfilling the interests of the West, the LDCs were struggling
for fair trade and economic order. In the early 1960s, growing concerns about the place of
developing countries in international trade led many of these countries to call for the convening
of a full-fledged conference specifically devoted to tackling these problems and identifying
appropriate international actions. In response to this, and perhaps more anxiously for developed
countries not to lose these LDCs to Russia (socialism), UNCTAD (United Nations Conference
on Trade and Development) was established in 1964. Simultaneously, the developing countries
established the Group of 77 to voice their concerns. With the aims of promoting the
development-friendly integration of developing countries into the world economy and helping
shape current policy debates and thinking on development, UNCTAD was mandated to carry out
three key functions:
1. Functioning as a forum for intergovernmental deliberations, supported by discussions
with experts and exchanges of experience, aimed at consensus building;
2. Undertaking research, policy analysis and data collection for the debates of government
representatives and experts; and
3. Providing technical assistance tailored to the specific requirements of developing
countries, with special attention to the needs of the least developed countries and of
economies in transition. When appropriate, UNCTAD cooperates with other
organizations and donor countries in the delivery of technical assistance.
Despite its good performance at early ages, UNCTAD of the late 1980s and the 1990s virtually
converted itself into a minor research organization supportive of the attack of global capital.
What we have today is an UNCTAD that is not even a faint shadow of what it was in the 1960-
70s. With regard to GATT, two deficiencies in particular were noted with its mechanism.
 First, it was a consensus-based system. The Council made decisions on the basis of
consensus of the members throughout the process. As a result, any one member could
block the process.
 Second, the situation worsened after 1979 when a number of limited-membership
agreements on non-tariff measures so-called "codes" negotiated in the Tokyo Round –
entered into force. Seven of these had their own dispute settlement procedures and the
code obligations differed from those of the GATT, leading to a real risk of inconsistent
results. As a result, the system was characterized by delays, inconsistencies, uncertainty
and inadequacy of enforcement.
This experience, combined with the introduction of wholly new obligations under the GATS (the
General Agreement on Trade in Services) and TRIPS (Trade-Related Aspects of Intellectual
Property Rights) agreements led to a decision to give the WTO a single set of dispute settlement
procedures that would apply to all areas of trade relations covered by the new organization, and
whose progress could not be blocked by the need for consensus-based decision.
The last round of negotiations, called the Uruguay Round, began in 1986 and ended in 1994. At
the end of the negotiations, the members of GATT, as well as representatives from seven other
nations, signed a trade pact that will eventually cut tariffs overall by about one-third and reduce
or eliminate other obstacles to trade. All of the contracting parties to the new GATT pact at the
end of 1994 became members of the WTO upon ratifying the GATT pact.
The pact also took steps toward reduction of tariff on industrial products, tariffication of quota
and other non-tariff barriers to trade (and reduction of tariffs) on agricultural imports and imports
of textiles and apparel, opening trade in investments and services among member nations and
strengthening protection for intellectual property that is, creative works that can be protected
legally.
The 1994 GATT pact also provided for establishment of the WTO. In 1995, after the transition
period, GATT’s functions were taken over by WTO, an international body that administers trade
laws and provides a forum for settling trade disputes among nations. WTO is an international
body that promotes and enforces the provisions of trade laws and regulations. The WTO, created
to replace GATT, has the authority to administer and police new and existing free trade
agreements, to oversee world trade practices, and to settle trade disputes among member states.
Although the WTO operates a dispute settlement process similar to the one under GATT, it has
stronger power to enforce agreements, including authority to issue trade sanctions against a
country that refuses to revoke an offending law or practice.
Besides, the WTO has a significantly broader scope than GATT which regulated trade in
merchandise goods only. The WTO expanded the GATT agreement to include trade in services
such as international telephone services, and protections for intellectual property such as sound
recordings and computer programs. Regarding the implementation of WTO rules concerning
agriculture, it (WTO) provides liberalization measures concerning trade of agricultural products
in order to solve the problems in three main areas:
(i) The great number of non-tariff barriers to trade which particularly impede trade of
processed goods;
(ii) The generally high tariff rates in the industrialized countries; and
 (iii) The escalation of the tariffs, in which higher tariffs are levied on goods exported at more
advanced stages of processing.
Tariff escalation is particularly pronounced in commodity sectors (such as meat, sugar, fruit,
coffee, cocoa, and hides and skins) that are important to many of the poorest developing
countries. The food-processing industry includes some of the highest levels of tariff escalation
and tariff peaks. Tariffs on fully processed foods in many cases are more than double the tariffs
on the basic food commodities. This is seen as one reason for the limited involvement of
developing countries in exporting processed products. Tariff escalation discourages investment
in agricultural processing in developing countries and blunts efforts to reduce dependence on
primary commodities and diversify into more highly valued products. Reducing tariff
escalation has been identified as one of the most important market access issues in the current
WTO negotiations on agriculture. Thirteen of the 45 negotiating proposals that have been
submitted called for substantial reductions in tariff escalation, particularly in the developed
countries.
The initial target set for developed countries to convert all non-tariff barriers to tariff equivalents
and reduce average tariff rates by 36% until 2000 and for LDCs to reduce average tariff rates by
24% until 2004, was not met particularly in the former case. Even if the developed countries
were to meet the terms of the target and the average tariffs faced by developing countries were
low, tariff peaks that are substantially higher than the average are applied for a number of the
commodities they export, such as sugar and horticultural products. For each commodity group,
the developed countries have more tariff peaks and higher average peak tariffs than the
developing countries. A loophole in the provision of WTO allows the possibility of keeping tariff
rates of some commodities at high levels as long as the average rate is reduced. There is also
another loophole which permits developed countries to postpone the liberalization of the market
for their “sensitive” products.
In summary, one end result of globalization is the rapid increase in both the absolute level, and
the proportion of, goods traded. This is facilitated by both rapid advances in technologies which
contribute to reductions in transport, information and transaction costs, and by the efforts of
governments to reduce barriers to trade. However, there is an implication of frictionless
movement and perfect knowledge that understates the requirements for benefiting from
globalization. Globalization immediately transmits lower prices to producers who may not have
participated in cost reduction, and who will experience a decline in income.
Concurrent to the cost reducing advances in technology, governments have worked to reduce
barriers to increased trade flows. Although it is the failure of the WTO to deliver the proposed
benefits that has provoked criticism by the international NGOs, the imbalance in agricultural
sector reforms, runs deeper than those associated with the multilateral trade-related reforms. In
the context of unilateral reforms, structural adjustment programs implemented over the past few
decades have resulted in radical reform of the agricultural sectors of many developing countries,
a period during which the majority of OECD agricultural sectors have continued to be heavily
protected.
Whilst it is generally acknowledged that unilateral reforms were often required, it has also been
contended that the process adopted has, in many cases, severely damaged the capacity of
developing countries to increase levels of agricultural production and/or productivity. These
unilateral reforms tend to have been reinforced by multilateral agreements. Unilateral trade
liberalization has been undertaken in developing countries under pressure from international
finance institutions as part of structural adjustment and stabilization programs. By contrast,
agricultural trade has only recently been impacted by multilateral agreements.
WTO rules constrain the extent to which countries can protect themselves from increased
competition. This has resulted in a number of NGOs, Oxfam and CAFOD (Catholic Agency for
Overseas Development) for example, suggesting that the more negative aspects of unilateral
liberalization in developing countries have been compounded by double standards in
commitments to multilateral agreements, and maintaining that the “you liberalize, we subsidize”
attitude is extremely damaging.
Chapter Summery
 The developed countries experience a regularly outward moving supply curve due to
progress in agricultural science and technology and their farmers face the problem of
adequate market for their products.
 Agricultural subsidies in developed countries may seem good to importers of food.
 Globalization is a broad concept casually used to describe a variety of phenomena that reflect
increased economic interdependence of countries.
Review Question
1. Why food aid by the ICs is considered counter-productive as far as the economies of LDCs
are considered?
2. Discuss how export subsidy helps the ICs protect their farmers/agriculture.
3. What were the major loopholes in the GATT negotiations?
4. What is farm income problem?
5. Why does the commodity TOT move against agricultural products?
6. What is globalization? Discuss the potential positive and negative consequences of
globalization in human development.
7. What are the objectives of GATT
8. What were the mandates of UNCTAD?
9. How do the WTO measures attempt to solve the problems concerning the trade of
agricultural products?
 CHAPTER EIGHT
8. AGRICULTURAL POLICIES CONCEPTS AND FRAMEWORKS
8.1. INTRODUCTION
Policy is an integral part of the planning process and is specified successively at the macro,
sector, sub-sector, program/project and operation of an economic unit level. Land ownership and
the structure of farm enterprises were traditionally regarded as primarily social problems.
Agricultural policy implies state intervention in the economy of agricultural product, whereas a
policy refers to the specific types of intervention further down the planning process. It is
essential that these are consistent and complementary to each other.
The general economic policy has been formulated, it is imperative that sector level policies are
drawn up that are consistent with the general policy. Agricultural policies aim to address a wide
range of issues, from assisting farmers to achieve adequate incomes to providing sufficient food
at reasonable prices for consumers, and from improving the sector's resilience to weather, market
or other shocks to ensuring food safety and improving the environmental problems.
This section provides a detailed review of agricultural policy analysis and some specific policy
issues in the development of the agricultural sector. The chapter is subdivided into two sections.
The first section provides a very brief introduction on the policy analysis in general and of the
agricultural sector in particular. Policy framework and reforms that affect agriculture sector will
be discussed in detail.
After reading this chapter, you will be able to understand;
 Understand the concept of agricultural policy analysis,
 A policy framework and agricultural policy analysis
 Food policy analysis different models of agricultural growth/development and
 Understand the analysis of food policy
 Gain an insight into the understanding of SAP
 8.2. Agricultural Policy Analysis
Dear learners, it is imperative that governments’ general objectives for economic development
are usually defined in the form of policy statements. They specify the major goals to be achieved
and the forms of suitable economic organization for resource ownership and management.
Consistent with this are then drawn up sector policies, sub-sector policies, etc. In the case of
agriculture development, typical objectives may include faster growth of agricultural output,
peasant sector development, reduction of rural poverty, more efficient marketing, more stable
prices of agricultural products, more equitable rural land distribution and more attractive rural
land tenure system, privatization of agriculture, improvement of status of pastoralists, etc.
Agriculture analysis is a very important aspect to crop growing. To increase quality and yields, it
is crucial to understand the current nutrient levels of the soil to be able to ascertain which areas
require improvement. They emphasize almost same objectives like to provide food for the
inhabitants of the nation (food security and sufficiency) and export excess to other countries and
to provide rural dwellers and farmers with extension services, agricultural support and rural
development services. As regards organizational arrangements, agriculture sector policies may
define the types of economic enterprise that will be encouraged (e.g., small farmers, pastoralists,
cooperatives, private commercial farms, state farms, etc.), the role and size of domestic and
foreign participation, and the extent to which markets and prices will be subject to official
regulation. These policy declarations about the ends and means of agricultural development
represent the fundamental terms of reference for any agricultural planning exercise.
A fairly conventional approach to the formulation of agricultural policies in developing countries
is that which focuses on the relationship of policy to the inputs and outputs of the farm system
and thus aims at influencing the inputs, outputs, and technology of farm household production.
In this respect, some eight policies can be distinguished, viz., price policy, marketing policy,
input policy, credit policy, mechanization policy, land reform policy, research and extension
policy, and irrigation policy.
The policy analysis, evaluation and study of the formulation, adoption, and implementation of a
principle or course of action intended to ameliorate economic, social, or other public issues.
Policy analysis is concerned primarily with policy alternatives that are expected to produce novel
solutions. Policy is a government actions aimed at changing economic behavior. It is a deliberate
course of actions followed by the government in managing affairs based on a definitive plan or
program created through a process of thought and reason. It involves planning based on certain
beliefs, values, and goals, taking into account the resources that may be available for reaching
the goals, and the benefits and costs of using one plan or another.
The basic concept of policy is that of deliberate action that involves the following elements:
i. The goals that may be established,
ii. The means that may be used to reach these goals,
iii. The implements such as agents or agencies that activate or control the means,
iv. The constraints that are applied to the plan or program. Some of the constraints
could be beyond the control of the policy maker; not all factors are under the
control of governments, and
v. Side effects, adverse outcomes of a given policy, which should be minimized.
The discussion and success of any policy presupposes:
 The existence of a powerful state/government (not a personal authority),
 A state which is stable,
 A state that is acceptable by the people, and
 A state that is accountable to the people.
It is difficult to sensibly talk about government policy where these presumed points are not
fulfilled. On the other hand, analysis refers to the evaluation of government decisions to change
economic behavior. Hence policy analysis is defined as the evaluation of government actions that
aim at changing the behavior of producers and consumers. A policy framework is generally
represented by a circular set of causal linkages among different components: policies,
constraints, objectives, and strategies. A policy framework provides an overarching structure that
guides how policies and procedures will be developed, approved, communicated and reviewed.
An effective policy framework clearly documents the processes to be followed at each stage of
the policy life cycle.
 Graphic Representation of a Policy Framework

Strategies Consist of Policies

Permits the
Work through
evaluation of

Objectives Constraints
Further of
impede
As depicted in the panel above, objectives are the desired goals of economic policy as defined by
policy makers. On the other hand, constraints are the economic realities that limit what can be
accomplished. Governments use Policies as instruments that to change economic outcomes,
whereas strategies of policy makers consist of sets of policies that are intended to improve
economic outcomes. The selected policies work through the constraints set by economic
parameters. The constraints set by supply, demand, and world price conditions, either further or
impede the attainment of objectives. An assessment of the impact on objectives permits an
evaluation of the appropriateness of given strategies. A good policy framework (sometimes
referred to as a policy charter, policy guidelines, policy development guidelines, or policy
mission statement) sits at the top of the policy hierarchy. It forms the capstone of all policies
below it, and guides how they are to be developed.
8.3. Objectives of Policy Analysis
Policy analysis is the process of identifying potential policy options that could address the
problem and then comparing those options to choose the most effective, efficient, and feasible
one. Most goals of government policy fall under one of three fundamental objectives efficiency,
equity, or security.
 Efficiency is achieved when the allocation of resources produces the maximum amount
of income and the allocation of goods and services brings highest consumer satisfaction.
 Equity refers to the distribution of income among groups or regions that are targeted by
policy makers. Typically, greater equity is achieved by more even distribution of income.
  Security is furthered when political and economic stability allows producers and
consumers to minimize adjustment costs. In light of this for instance food security refers
to the availability of food supplies at affordable and reasonably stable prices. More on
food security will be discussed in a latter section.
 Trade-offs arises when one objective can be furthered only if another is impeded that is,
when gains for one goal result in losses for another. When trade-offs exist, policymakers
have to place weights on the conflicted objectives by determining how much they value
gains for one objective versus losses for the second objective. Policy makers’ not
economic analysts have the responsibility to make these value judgments and assign
weights to objectives. In the rare instances when trade-offs do not arise, policy analysis
and policy making are easy. The desired result is to move forward to the extent that
resources permit. Typically, however, economic analysts need to evaluate policies, and
policy makers need to make decisions by placing weights on objectives.
8.4. The Need for Policy
Policies define the goals of an organization and provide guidance about how to achieve
objectives. Policies identify key activities, such as the collection of rental arrears and capital
replacement planning. Policies also address things such as: general building rules. State has a
central role to play in accelerating the pace of growth towards achieving the objectives stated
earlier. State also needs to carry out tasks, which are unlikely or impossible, if they are left only
to market forces because of market failures. Market refers to production, consumption and
distribution decisions made by households and individuals as producers, consumers and
distributors, the combined effects of which result in the determination of a market The factors
that contribute for market failures are failure of competition, lack of private interest in the supply
of public goods and services, presence of externalities, common property resources and sub-
optimality, lack of information and infrastructure, interplay of macroeconomic forces, and the
presence of socially unacceptable forces disrupting market forces. The above stated factors for
market failures reveal that it is inevitable for state intervention to seek solutions and gear towards
sustainable development.
 Failures of competition could be due to the existence of various types of monopoly power
in the economy.
  Lack of private interest in the supply of public goods and services, such as police force,
national defense, street lighting, roads, etc.
 Presence of externalities, which could be negative or positive and when there are
externalities there will be difference between marginal net benefits and costs.
 Common property resources such as common grazing areas, which are always subjected
to overgrazing and permanent damage to the resource.
 Lack of infrastructure and incomplete information,
 Interplay of macroeconomic forces such as money supply, exchange rate, taxation,
inflation, etc.
 The presence of socially unacceptable forces disrupting market forces such as poverty,
inequality and others.
The view that state interventions are effective in overcoming the above stated market failures are
based on the critical assumption that ‘government and state act benevolently to secure the public
interest.’
Dear students, but it is also evident that there are also state failures mostly in developing
countries, which are equally having detrimental effect as market failures. State failures are
resulted as the result of information failures, complex side effects (there is no way to predict the
secondary and tertiary effects of actions), implementation failures, and motivation failures and
rent seeking behavior.
8.5. Agricultural Policy Formulation
Policy formulation refers to how problems identified in the agenda-setting phase transform into
government programs. As the process of designing policy alternatives expresses and allocates
power among different interests, policy formulation affects both implementation and outcomes.
The conventional approach to agricultural policy formulation is to focus on the relationship
between inputs and outputs, and their accessibility to end-users. In the context of agricultural
development, eight distinct policy interventions widely used in developing as well as developed
countries are:
 Price policy,  Mechanization policy,
 Market policy,  Land reform policy,
 Input policy,  Irrigation policy
 Credit policy,  Research and extension policy.
 8.5.1. Price Policy
Dear students, what is a pricing policy? A pricing policy is a company's approach to determining
the price at which it offers a good or service to the market. Pricing policies help companies make
sure they remain profitable and give them the flexibility to price separate products differently.
Price policy is designed to influence the level and stability of the prices received by farmers and
paid by consumers for farm outputs. It is a very important factor as it influences the entire fabric
of an agricultural economy.
In general, it has three main functions. These are;
1) Allocation of farm resources: It follows from the optimization behavior of producers in
a market system described by neoclassical production economics as “increase in the
general level of output prices increases returns to all inputs in production, encouraging
higher use of variable inputs”.
2) Income distribution: It follows from the implication that high farm prices
raise producer income and lower the real incomes of consumers
3) Determination of the level of investment and capital formation in agriculture: This
looks into the long-run cumulative effects of high farm output prices high farm prices
relative to those in other sectors increase the rate of return to capital in agriculture and
encourage investment in various ways. Besides, it permits saving at farm household level
across seasons, encourages the flow of credit into agricultural activities.
Primary objectives of the price policy include:
• To influence agriculture output
• To achieve desired changes in income distribution
• To influence the role and contribution of the agriculture sector to the overall process of
economic development
Secondary objectives include:
 To increase aggregate agriculture output (across all crops and enterprises)
 To increase the output of individual crops (export versus food crops,
perennial versus annual crops, etc.)
 To stabilize agricultural prices, both in order to reduce uncertainty for
farmers and to ensure stable food prices for consumers.
 To stabilize farm incomes, as distinct from price stability

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  To achieve food self-sufficiency (it has links with the above)
 To generate government tax revenue either from export taxes or import taxes
 To generate or save foreign exchange, and thus to contribute to the balance of
payments.
 To ensure that the manufacturing sector is supplied with cheap food and raw
materials in order to accelerate the pace of industrial growth.
 To maximize the investible surplus that can be extracted from agriculture for
investment in manufacturing sector.
Critical thinking questions: Dear learners, please try to look into the negative aspects of high
farm output price policy from poor-rich, rural-urban, country-city, and agriculture industry
perspectives.
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8.5.2. Marketing policy
Dear students, what is marketing policy, marketing policy means the set of principles described
in a certain brand and product marketing Manual, which has been provided to Licensee prior to
or contemporaneously with the execution of this Agreement. The marketing of farm output is
typically thought to play a dual role. One dimension is the transmission of price signals between
consumers and producers. As an example, an increase in demand for maize causes prices to rise
in an urban center and this information is passed back to producers through the marketing
system. The other dimension is the physical transmission of the commodity from points of
production by farmers to points of purchase by consumers.
Marketing policy is concerned with the transfer or movement of farm outputs from the farm-gate
to the domestic consumer or to ports of export. It has two major roles;
(i) In the transmission of price signals between consumers (demand) and producers
(supply),
(ii) In the physical movement of the output from points of production by farmers to
points of purchase by consumers.

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The marketing systems are more typically thought of as vertical commodity systems or
marketing channels, in which the commodities passes through a sequence of stages / events. The
main sequential stages in marketing are: -
a) Primary procurement (Assembly): in which the commodity is purchased
from farmers and assembled at local village, or district level stores, or mills;
b) Processing: in which the commodity is milled or transformed prior to onward distribution;
c) Wholesale: in which the commodity changes hands in bulk at wholesale markets;
d) Retail: in which the commodity is sold to its direct consumers
The objectives of government intervention in agricultural marketing are closely related to
perceptions about the structure (number, size and diversity of participants), conduct (reliability,
timeliness, quality) and performance (speed and accuracy of price adjustment, the stability of
prices and margins, etc.) of private marketing channels. The objectives most commonly
advanced for government marketing policies are:
 To protect farmers and/or consumers from parasitic traders
 To stabilize or increase farm-gate prices
 To reduce the marketing margin (state intervenes to narrow the gap between consumer
and producer prices)
 To improve quality and minimum standards of consumable or exportable agricultural
commodities (more of regulatory than direct intervention)
 To increase food security (traders hoard grain for speculative purposes, which
exacerbates food shortage and increase price instability).
8.5.3. Input Policy
Dear students, what is input policy, input policy is the way governments try to influence the
quantities and combination of variable inputs used by farmers. Input policy is designed to
influence the prices and delivery systems of purchased variable inputs used in farm production.
Purchased variable inputs include chemical fertilizers, pesticides, herbicides, improved seeds and
high yielding varieties, fuel, animal feeds, etc. The policy has three major dimensions. These are;
(i) Price level of variable inputs,
(ii) Delivery system for the inputs, and
(iii) Information available to farmers regarding type, quantity and combination of inputs
suitable for their farm systems.

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 (iv) Credit for the purchase of variable inputs
New seeds, fertilizers and irrigation water are complementary input meaning the highest levels of
yield are only achieved by the simultaneous increase of all variable inputs in the correct
proportions. If one is missing the intended result will not be achieved. The complementarity of
the variable inputs leads to the idea of delivery of an input package to farmers to achieve desired
output in an earlier literature called this the Green Revolution Package.
The package approach envisages a major role for the state, investment in public irrigation
schemes, delivery to farmers of certified seeds together with the appropriate quantities of
fertilizers and other farm chemicals, provision of credit, and advice concerning the proper
agronomic practices to put into effect.
In line with the preceding discussions, the objectives of state intervention in input markets can be
distinguished between the general and the specific, and between farmer, input market, and input
supply dimensions as:
1. In general, to accelerate and make more uniform the adoption of new technology by farmers,
in situations where, first farmers are thought to underestimate the gains to be made by
adopting new input combinations, and second where markets are considered unable to deliver
the new inputs with sufficient competitiveness, timeliness, quality, accuracy of information,
and geographical coverage.
2. To overcome risk-averse behavior by farmers, which causes them to underestimate the
returns to using new inputs;
3. To avoid mistakes in input use by farmers, which might happen on a trial and error basis,
because a high occurrence of such markets will tend to accentuate risk aversion and slow
down the uptake of new inputs by farmers;
4. To avoid the adoption of wrong/dangerous inputs by farmers caused by over-zealous sales
behavior by private input supply companies in poorly regulated markets
5. To provide a delivery system for inputs under conditions where private markets in farm
inputs are non-existent, unevenly developed, or non-competitive.
6. To combine input delivery with credit provision in order to alleviate the working capital
constraint on the adoption of new inputs.
7. To regulate and control the market for improved seeds, in order to ensure
the genetic quality of named varieties in seed replication and seed delivery to farmers.

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8. To regulate and control the market for improved pesticides or disease control chemicals in
the context of measures designed to contain the spread of pests and diseases in crops grown
under monoculture or near monoculture conditions.
8.5.4. Credit policy
Dear students, what is credit policy, a credit policy is a set of terms that lays out how your
company will issue credit to its clients and collect unpaid debts. Anytime you invoice a client for
services and begin working before the client pays you, you're technically working on credit, even
if you don't have a formal credit policy. Credit policy concerns mainly, but not exclusively, on
the provision of working capital for the purchase of variable inputs used in farm production.
Generally, the policy aims at (i) alleviating a critical constraint which hampers growth in
agricultural output, (ii) replacing the fragmented and incomplete rural financial market
dominated by selfish private money-lenders, (iii) accelerating the adoption of new technology by
peasant farmers, and (iv) achieving equity goals, whether these are intra-rural, inter-regional, or
rural-urban income distribution.
Poor performance of the agricultural sector in less developed countries has resulted in
incapability of farmers to produce surplus marketable output for acquiring some invest-able
capital for adoption of modern inputs and technology. In line with reality, government and
private financial institutions, and donors are involving in the provision of credit to peasant
households.
Credit is a sum of money in favor of the person to whom control over it is transferred. It involves
two parties: a lender and a borrower. It also involves a price for the transfer of control over
money, which is the interest rate. The market for credit contains a demand schedule, a supply
schedule and a price (interest rate) that adjusts to bring demand and supply into balance.
Credit has always a special place in mainstream thinking on agricultural development in
developing countries. Indeed, the sector was the largest recipient of donor assistant and aid. The
objectives of the old credit policy, and the reasons for their popularity with governments and aid
donors alike, are summarized as follows:
 To alleviate a critical constraint hampering growth in agricultural output, this constraint
being lack of cash to make needed farm investment (irrigation, drainage, pumps, tractors,
buildings) and to purchase modern variable inputs (fertilizer, pesticides, fuel, feeds, etc.);

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 To replace the fragmented and incomplete rural financial market represented by private
moneylenders, these credit sources supposedly having the effect of impoverishing their
clients rather than assisting them to improve productivity;
 To accelerate the adoption of new technology by peasant farmers, by providing working
capital for the seasonal purchase of variable inputs, and then optimizing the
complementarity’s between inputs.
 To assist small farmers to overcome their inability to borrow from commercial or
informal credit sources, due to lack of collateral and lack of information;
 To provide short-term credit in order to bridge seasonal and temporal cash shortfalls of
small farmers, compared to the medium and long-term lending preferences of commercial
financial institutions;
 To achieve equity goals, whether these are related to intra-rural, interregional, or rural-
urban income distribution;
 To offset the disincentive effects for small farmers of policies unfavorable to them
including low output prices, over-valued exchange rates, and inefficient market
interventions by state;
 To gain favor with farmers for political purposes, including forthcoming elections, and so
on;
 To take advantage of the sometimes-overwhelming generosity of foreign aid donors, who
seem to be, prepared to pump large amounts of money endlessly into rural credit project.
The critical new objective of credit policy is therefore the creation of a self-sustaining
rural financial system. The following three important points are relevant in changing the
direction of policy instruments:
1. Savings Mobilization: the generation of funds from savers is considered a
key feature of self-sustaining credit institutions.
 First, a strong savings base reduces the reliance on external funding.
 Second, savers and borrowers are often the same people at different points in time
in the community, reducing the information costs of transactions.
 Third, people to an institution for both saving and borrowing are less likely to
default on loans.

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  Lastly, farmers with savings can often self-finance small outlays so that loans
become oriented to bigger outlays with lower transaction costs per unit of money.
2. Interest Rate Level:- a self-sustaining financial system requires an interest rate on loans
sufficient to cover:
o The interest rate paid to savers
o The average cost of making transaction.
o A risk margin to cover the probability of default
3. Loan Recovery: poor loan recovery amounts to giving borrowers a gift, it encourages the
use of credit for non-productive purposes, and it promotes the idea that rural development
is more about cash hand-outs than about improved productivity and outputs.
8.5.5. Mechanization Policy
Dear students, what is mechanized policy Mechanization policy?
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Mechanization increases the power applied to agricultural operations and is one tool among
many for improving farm productivity. It alone cannot drive the transformation of agriculture
(Pingali, 2007). Mechanization policy is designed to influence the pace and direction of the
adoption of mechanical technologies, or farm fixed capital, by farmers. Given the resources and
constraints of the farm sector and the economy at large, the policy is concerned with the
appropriate pace of the transition amongst.
(i) Hand tools and implements that increase the effectiveness of human power or energy,
(ii) Animal - draught power, in which machines or equipment are driven by animals, and
(iii) Mechanical power, in which engines or motors (powered by fuel or electricity) are
used to drive farm machines.
8.5.6. Land reform policy
What is land reform policy? land reform, a purposive change in the way in which agricultural
land is held or owned, the methods of cultivation that are employed, or the relation of agriculture
to the rest of the economy. Reforms such as these may be proclaimed by a government, by
interested groups, or by revolution. Land reform policy seeks to alter the ownership distribution
or conditions of access to land as a resource in farm production. It covers a wide range of social

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changes involving the access of people to land, the ownership structure of land, the size structure
of land holdings, and legal or contractual forms of land tenure. Land reform has always a mixture
of political, social and economic objectives.
Land reform policy covers a wide range of social changes involving the access of people to land,
the ownership structure of land, the size structure of land holdings, and legal or contractual forms
of land tenure. In the hierarchy of state interventions affecting farm inputs and outputs, land
reform is a special case. This is due to a number of considerations:
2. Land is more than just ‘another resource’ in farm production,
3. Land ownership structures are inseparable from structures of social status and power
in the agrarian economy, and
4. Land reform is often associated with social upheaval and dramatic change, rather than
the relatively stable political and social conditions upon which the implementation of
other policies is typically predicated.
8.5.7. Research and Extension Policy
The Research and Extension element strengthens national capacities for agricultural innovation
through appropriate research and extension policies, strategies and technical support, including
initiative such as the Capacity Development for Agricultural Innovation Systems (CDAIS) and
other Technical Cooperation Programmes. If statements such as those above are examined more
carefully, and if the current ideas and practice of extension are considered, four main elements
can be identified within the process of extension: knowledge and skills, technical advice and
information, farmers' organization, and motivation and self-confidence.
Agricultural extension policy is a part of national development policy in general and of
agricultural and rural development policy in particular. Hence, agricultural extension is one of
the policy instruments which governments can use to stimulate agricultural development.
Research and extension policy is concerned with the generation and diffusion of new technology
designed to increase the productivity of resources in farm production. In this respect, generation
refers to the undertaking of research, and diffusion to the provision of extension services or other
dissemination methods for spreading information among farmers. These all indicate for the need
to create strong link between research and extension services.

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 8.5.8. Irrigation policy
What is mean by irrigation policy? The National Irrigation Policy is a sectoral national policy
adopted by the Ministry of Food and Agriculture to address the problems, constraints and
opportunities, which cut across the whole irrigation sub-sector; and specifically for informal,
formal and commercial irrigation. Irrigation policy is concerned with the provision of water as a
resource in farm production, often involving large-scale public investment in the infrastructure of
farm production. Irrigation may be defined as the use of human technology to increase and to
control the supply of water for crop production. Whilst in most cases, irrigation is provided to
supplement rainfall in crop production; it is sometimes supplied in places (e.g., arid and desert
regions) where no crop production is possible without irrigation.
Irrigation helps to grow crops, maintain landscapes, and revegetate disturbed soils in dry areas
and during times of below-average rainfall. In addition to these uses, irrigation is also employed
to protect crops from frost, suppress weed growth in grain fields, and prevent soil consolidation.
Irrigation is about the supply and demand for water as a variable input into crop production.
Irrigation policy is about the role of the state in promoting or providing irrigation facilities. It is
also about policy choices that exist with respect to alternative irrigation technologies, the
management of large-scale irrigation schemes, and alternative methods for recouping from
farmers the cost of providing them with irrigation.
Irrigation may be well-defined as the use of human technology to increase and to control the
supply of water for crop production. In most cases, irrigation is supplementary to the naturally
occurring supply of water to crops from rainfall. However, there are important examples - in
arid and desert regions - where there would be no crop production at all in the absence of
irrigation. From an economics point of view, irrigation represents a classic example of market
failure, and thus state involvement of one kind or another has been virtually axiomatic in most
kinds of irrigation development.
8.6. Food Policies
Food policy is the area of public policy concerning how food is produced, processed, distributed,
purchased, or provided. Food policies are designed to influence the operation of the food and
agriculture system balanced with ensuring human health needs. Food security as a concept
originated only in the mid-1970s, in the discussions of international food problems at a time of
global food crisis. The initial focus of attention was primarily on food supply problems of

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assuring the availability and to some degree the price stability of basic foodstuffs at the
international and national level. Food security was defined in the 1974 World Food Summit as
Availability at all times of adequate world food supplies of basic foodstuffs to sustain a steady
expansion of food consumption and to offset fluctuations in production and prices.
In 1983, FAO expanded its concept to include securing access by vulnerable people to available
supplies, implying that attention should be balanced between the demand and supply side of the
food security equation ensuring that all people at all times have both physical and economic
access to the basic food that they need. In 1986, the highly influential World Bank report
“Poverty and Hunger” focused on the temporal dynamics of food insecurity. It introduced the
widely accepted distinction between chronic food insecurity, associated with problems of
continuing or structural poverty and low incomes, and transitory food insecurity, which involved
periods of intensified pressure caused by natural disasters, economic collapse or conflict. This
concept of food security is further elaborated in terms of: access of all people at all times to
enough food for an active, healthy life.
By the mid-1990s food security was recognized as a significant concern, spanning a spectrum
from the individual to the global level. However, access now involved sufficient food, indicating
continuing concern with protein-energy malnutrition. But the definition was broadened to
incorporate food safety and also nutritional balance, reflecting concerns about food composition
and minor nutrient requirements for an active and healthy life. Food preferences, socially or
culturally determined, now became a consideration.
The 1996 World Food Summit adopted a still more complex definition food security, at the
individual, household, national, regional and global levels is achieved when all people, at all
times, have physical and economic access to sufficient, safe and nutritious food to meet their
dietary needs and food preferences for an active and healthy life. This definition is again refined
in The State of Food Insecurity 2001.
Food security is a situation that exists when all people, at all times, have physical, social and
economic access to sufficient, safe and nutritious food that meets their dietary needs and food
preferences for an active and healthy life.
In general, food security is a multi-faceted concept, variously defined and interpreted. At one end
of the spectrum food security implies the availability of adequate supplies at a global and
national level; at the other end, the concern is with adequate nutrition and well-being. Policy

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statements on food security usually give less importance to transitory food insecurity and the
risks of acute food crisis. The frequently reiterated assurance that there is globally enough food
to feed everyone should be supported not only by the success in overcoming chronic food
insecurity but also by successes in limiting transitory food insecurity.
The major sources of transitory food insecurity are:
 Year-to-year variations in international food prices, foreign exchange earnings, domestic
food production and household incomes. Temporary sharp reductions in a population’s
ability to produce or purchase food and other essentials undermine long term
development and cause loss of human capital from which it takes years to recover.
 Natural disasters (like climatic variability and the occurrence of extreme events such as
drought, flood and storms), humanitarian problems (for instance, deterioration in the
health status because of rapid spread of HIV/AIDS) and conflicts. These factors have
both severe short-term and persisting long-term negative effects.
 It is possible that liberalization increases the risk of shock that precipitates a food crisis or
makes populations, at least during the transition in trade regimes, more vulnerable. At a
national level, agricultural liberalization could be associated with increased volatility in
production and prices. It is possible that the current crisis in Sub-Saharan Africa is the
consequence of a combination of some or all of these factors.
Essentially, food security can be described as a phenomenon relating to individuals.
 Household food security refers to the application of the concepts in the above
definitions to the family level, with individuals within households as the focus of
concern.
 Food insecurity exists when people do not have adequate physical, social or economic
access to food as defined above.
The ability to ensure adequate food security hinges on the ability to identify vulnerable
households. Vulnerability refers to the full range of factors that place people at risk of becoming
food insecure. The degree of vulnerability of an individual, household or group of persons is
determined by their exposure to the risk factors and their ability to cope with or withstand
stressful situations. Generally, vulnerable households will constitute three groups:

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 (iii) Those which would be vulnerable under any circumstances: for example, where
the adults are unable to provide an adequate livelihood for the household for
reasons of disability, illness, age or some other characteristic;
(iv) Those whose resource endowment is inadequate to provide sufficient income from
any available source; and
(v) Those whose characteristics and resources render them potentially vulnerable in
the context of social and economic shocks: e.g. those who find it hard to adapt to
sudden changes in economic activity brought about by economic policy. A
significant increase in the consumer price of staple foods might be an example.
An appropriate proxy in identifying vulnerable households is provided by how poor a particular
household as measured against some established criterion or ‘poverty-line’ is. It can be assumed
that the first two categories will be relatively poor both in terms of income and assets. It is also
likely that the third category will have a fragile/weak resource base and other characteristics
which make its income sources uncertain.
Having defined who the poor are, the second step is to identify their household characteristics:
 Location: rural/urban; small village/large village; remote province/near to capital city;
etc.;
 Composition: size, age and dependency ratios; male/female head;
 Sources of income: production, employment, trade, remittances and other transfers.
A frequent problem in delineating those sections of the population most vulnerable, or at risk
from changes in policy direction, is the lack of baseline data regarding household income and
consumption patterns.
8.6.1. Entitlements to Food
The entitlement theory looks at how communities can become food secure specifically looking at
food access; whilst the systems theory looks at how the communities can become food secure. A
combination of the two theories helps the study to answer all the research questions as they play
a complementary role. What are entitlements to food? a) The term refers to social welfare
programmes, e.g. the Fair Price food shops in India. b) It means the pathways through which
people access food, whether by production, purchase, social protection programmes or other
means. The notion of household entitlement to food, derived from the work of Amartya Sen, is
now widely used to investigate issues related to food security. The word “entitlement” refers to

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the various means through which households avail themselves of food. Sen identifies four types
of entitlements to food:
 Production-based entitlement – command over food grown for personal/household
consumption using personal or household resources,
 Trade-based entitlement – command over food purchased with income generated
through the sales of resources a person or a household has,
 Own-labor entitlement – command over food obtained by selling labor services, and
inheritance and transfer entitlement – access to food by means of transfers from sources
external to the household, i.e., from aid donors, the state, or friends and relatives.
Trade-based and own-labor entitlements are together called exchange entitlements. A number of
the above activities that entitle a household to food may be pursued by the same member of each
household, or by different members. Entitlement can also be perceived as the household’s ability
to express effective demand for food. It presupposes the availability of food, since for demand to
be effective it must be capable of being transformed into consumption. This applies as much to
food grown for household consumption as to that purchased with income generated through
other activities or from transfers. Demand is expressed in these decisions.
Entitlement as a construct introduces an ethical and human rights dimension into the discussion
of food security. There has been a tendency to give food security a too narrow definition, little
more than a proxy for chronic poverty. The opposite tendency is international committees
negotiating an all-encompassing definition, which ensures that the concept is morally faultless
and politically acceptable, but such a definition would be unrealistically broad. The risk with
using the rights rhetoric is that, it can be ridicule to tell someone that he/she has the right to food
when there is nobody with the duty to provide him/her with food.
Household activity or transfers do not directly result in access to food, for there are a number of
intervening stages that mediate the process. Both governments and agencies concerned to
augment household food security intervene in order to mediate between potential and reality. In
the first place, the resource endowment of the household will determine its capacity to produce
or to trade. Events such as civil unrest or climatic disasters can seriously deplete households’
resource potential, and increase the likelihood of structural food insecurity. If what might have
appeared as a transitory problem is not to become chronic, the replenishment of productive
capability should be a necessary part of programmes aimed at reversing this process.

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Physical resources by themselves, however, may be inadequate, and the upgrading or changing
of the range of skills possessed by household members may be a necessary component of any
program. Consequently, training in new agricultural techniques, or in the necessary skills
required by local industries or trades, can form an integral component of food security
interventions.
For many poor households, particularly those whose resource base has been eroded by drought,
additional resources are the primary requisite if their productive base is to be restored.
Recognition of this is apparent in the increasing emphasis on development programmes by
governments, agencies and donors alike. For other households, both rural and urban, access to
productive resources may be less relevant. These will seek, according to their location and
particular skills, to generate entitlement to food through trade or direct employment.
The promotion of income-generating activities of both local employment opportunities and self-
employment (particularly those associated with the rural informal sector) forms a second
essential approach to food security. Moreover, in circumstances where both the outcome of
productive activity is always uncertain and the purchasing power of cash-generating activities is
subject to sudden and dramatic shifts, it is both probable and desirable that households will seek
to diversify their occupations. This may be either through the principal income earner
undertaking a variety of activities, or through different household members generating income or
produce from a variety of tasks. Here again, policies designed to promote food security might
also simultaneously address resource and skill constraints.
Apart from the choice (insofar as one exists) between producing food or non-food crops, farm
households also make decisions about whether to retain or sell the food they produce. To some
extent, these decisions are dictated by the existence, and degree of efficiency of marketing
infrastructures and of household storage facilities. Where either of these is inadequate,
inopportune selling in unfavorable markets can have a detrimental effect on food security.
Inadequate storage facilities will, in most circumstances, lead to heavy storage losses,
significantly affecting the seasonal availability of food.
Finally, transfers from the state or individuals can augment entitlement to food. Typically, these
latter sources of entitlement take the form of cash payments or gifts, although in-kind payments
and remittances are also a common occurrence. It is important to recognize, however, that access
to food through any of these entitlement endowments contributes only to the availability of food

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to the household. It does not ensure efficient utilization and says nothing regarding intra-family
distribution, both of which can have a profound effect on nutritional status regardless of food
availability.
Food availability, therefore, does not imply food security. It is a prerequisite but not a sufficient
condition to ensure food security. Food insecurity could occur at any level even when there is no
problem of food availability at a higher level. Food could be available at the global level and
there might still be food insecurity at the national level; or, it could be available at the national
level and there might still be food insecurity at the household level; or, it could be available at
the household level and there might still be intra-household food insecurity (at the level of
individual members of a household).
8.6.2. Food Self-Sufficiency
Food Self-Sufficiency (FSS) is defined as the ability of a household or region to maintain its own
food requirements, which can be measured at different levels, and it began to take relevance
around 2007-2008 food price crisis. As with self-esteem, self-sufficiency gives a person a feeling
of security and contentment. It goes even further than self-esteem and provides a sense of
fundamental wholeness.
Self-sufficiency is the quality of feeling secure and content with oneself, a deep-rooted sense of
inner completeness and stability. On a superficial level, it's similar to secure self-esteem — it's
an estimation of oneself as a worthy and decent person Normally, the amount of food
requirement for consumption purpose at time t (Ct) comes from three sources: domestic
production (Qt), imports (Mt), and/or use of domestic food reserve or stock (St). Which of these
sources should a country rely on? Two broad options have generally been followed by countries
attempting to achieve adequate levels of food security: food self-sufficiency and food self-
reliance.
Food self-sufficiency refers to the provision of a level of food supplies from national resources
(Qt and St) above that implied by free trade. It represents a strategy followed by a wide range of
countries. While this approach implies the provision of sufficient domestic production to meet a
substantial part of consumption requirements, it does not necessarily imply that all households in
the country have access to all the food they require. In a number of countries which are net food
exporters, substantial numbers of households are suffering from malnutrition.

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Food self-reliance, on the other hand, is a strategy that reflects a set of policies where the sources
of food are determined by international trade patterns and the benefits and risks associated with
it. This strategy has become more common as global trade has become more liberal. It is even
argued that improved food security as well as efficiency gains may be achieved more
satisfactorily, even in countries where agriculture remains a major contributor to GDP, by
shifting resources into the production of non-food export crops and importing staple food
requirements.
The success of these broad options will depend, inter alia, on (i) the ability of producers to react
to price incentives (particularly important), or (ii) the ability of countries to use income gains for
improved efficiency of resource allocation in order to procure food on the international market.
The alternative of relying on international trade for achieving food security has been criticized on
the following grounds:
i. Unstable and unpredictable international markets may render the alternative of relying on
imported food to be an expensive alternative. The world price for food is highly unstable,
partly caused by the agricultural policies of the industrialized countries. Thus, relying on
the world market might result in a very high price when a nation is highly in need of
food, and/or a very low price when a country is on the verge of producing for external
market.
ii. If many of the poorest households in an LDC are dependent directly or indirectly on
agricultural production for their main income, the overall effect of a lower world price on
food security may be negative.
iii. LDCs are characterized by shortages of foreign exchange earnings, and thus it might be
difficult to rely on imported food. Liberalization might result in growth in imports
exceeding growth in exports, and this increased exposure to imports is associated with a
reduction in domestic productive capacity and in the purchasing power of consumers.
iv. Food imports might entail huge transportation and storage cost which could need subsidy.
v. Imports are also politically unacceptable strategies.
8.7. Structural Adjustment Program (SAP) and Agriculture
A structural adjustment is a set of economic reforms that a country must adhere to in order to
secure a loan from the International Monetary Fund and/or the World Bank. Structural
adjustments are often a set of economic policies, including reducing government spending,

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opening to free trade, and so on. The Breton Woods institutions, WB and IMF, attributed the
economic crisis and the widespread failure of early development efforts in LDCs to an excessive
government intervention in these economies. As such, they prescribed policy measures which
(they thought) could:
i. Stabilize the economies through better management of demand side imbalances, and
ii. Deal with the problem of the unsatisfactory economic growth through proper supply-side
measures intended to improve efficiency.
Meaning of Structural Adjustment Program (SAP)
Although these issues were initially assigned to the IMF and the WB (in that order), later, the
distinction in the divisions of labor or roles between the two institutions became a blurred one.
The following sketch sheds light on the policy instruments of the stabilization and structural
adjustment programs.
Adjustment Description
What? Prices The price that farmers in LDCs receive was
blamed to had been depressed by
government intervention (price controls).
So, GET PRICES RIGHT!
How? Through stabilizing IMF was responsible for short-term crisis
economy and improved management (stabilization) and the World
efficiency Bank (WB) focused on improving efficiency
What for? To improve imbalances Macroeconomic instability (imbalances) in
and bring about economic LDCs such as huge government deficits,
growth current and capital account deficits, BoP
problems, and domestic inflation are the
results of excessive government intervention
To what? To external/world market An open economy (in all dimensions)
shocks becomes more stable and more efficient
By whom? Mainly by African Adjustment under the umbrella of the WB
governments and IMF; the WB and IMF provide the
framework and the specific instructions for
the adjustment.

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 When? At the earliest possible Adjustment should be accomplished within
short period following the sequences of
policy measures prescribed by WB/IMF.
For whom? For the rich in particular As SAP initially neglected the equity issue
and focused on efficiency, it benefited the
rich at the expense of the poor. Only in its
later version (SAP with a Human Face) and
its harmonizing PRSP did it include the
issue of equity.
Description of the adjustments
The price that farmers in LDCs receive was blamed to have been depressed by government
intervention (price controls). So, get prices right! How? Through stabilizing the economy and
improved efficiency.
IMF was responsible for short-term crisis management (stabilization) and the World Bank (WB)
focused on improving efficiency. For what? To remove imbalances and bring about economic
growth.

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The World Bank's mission is to fight poverty by providing resources, sharing knowledge,
building capacity, and creating partnerships in the public and private sectors. But in reality, the
World Bank's agenda for development often leads to higher levels of poverty, increased income
inequalities, environmental degradation, and the breakdown of local families and rural
communities. Over the last two decades, structural adjustment lending at the World Bank has
been met with sharp criticism and international protest.
Proponents of SAP claim that these reforms are implemented to promote economic growth,
service debts and reduce poverty. However, twenty years after the first SAP, it is apparent that
these goals have not been realized. Many countries have fallen into greater debt, increasing
poverty and income disparities. For small farmers, these effects are magnified. Structural
adjustments in agriculture provide benefits to big agribusinesses, but they also marginalize the
rural poor, threaten local and national food security and devastate the environment.
Structural adjustment programs are essentially a series of measures to bring about economic
stabilization and structural changes in a country's economy, and are designed to improve a

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country's foreign investment climate and reduce government deficits through cuts in domestic
spending and generation of foreign exchange.
But the principal target of World Bank programs, “the poorest of the poor,” receives few, if any,
resources to help improve their standard of living. Farmers, who make up a majority of the poor
in developing countries, are among those hit hardest by structural adjustment, finding it difficult
not only to continue farming, but to get enough to eat. Today's agricultural reforms sacrifice rural
farming communities in the name of modernization shifting local economies from domestic to
international markets with little regard for impacts on rural communities and small and medium-
sized farmers. Governments give foreign corporations preferred access to local markets by
removing trade barriers and subsidizing export oriented agriculture, while local populations are
subject to massive cuts in social services and financial support. Rural communities are hit even
harder by elimination of policies protecting domestic food production and supporting traditional
farming.
Many requirements attached to structural adjustment lending affect small and medium sized
farmers. These requirements include:
 National commitments to generate foreign-exchange earnings through production of cash
crops and non-traditional export crops;
 Liberalization of agricultural trade, achieved in part by replacing fixed prices with
market-determined prices;
 Provision of incentives and subsidies for export-oriented agriculture and removal of
subsidies for staple food production;
 Reduction in availability of credit to local farmers; and
 Cuts in staff and resources in agricultural departments and government services
Lacking experience in non-traditional, export crops (or cash crops), the promised higher incomes
through production of fruits, flowers and vegetables rarely reach small and medium-sized
farmers. Most cash crops require substantial, initial capital investments far beyond the reach of
small farmers. These include complex irrigation systems, agricultural inputs, sophisticated
marketing systems and information on topics ranging from cultivation techniques and
international market dynamics to how to deal with new costs such as transportation. It comes as
no surprise that foreign corporations and local elites dominate both production and marketing of
these crops.

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Additionally, small farmers rarely have access to the financial capital or technical expertise to
make the shift from local food to export crops. The capital investments required to "play the
game," even in the short term, quickly force out small farmers who cannot afford expensive
inputs nor get loans to purchase them. While some World Bank-financed structural adjustment
projects provide communities with input packages, farmers are generally required to pay for
them.
Rural families find themselves spiraling deeper into debt as a result of poor harvests – a
phenomenon common to small farmers struggling to make the transition to new cash crops. In
contrast, large, foreign-owned agricultural businesses make the leap to export production more
easily and benefit from the additional array of subsidies and incentives available to exporters.
Consistent with the goals of large-scale, export agricultural systems, many governments pass
legislation that indirectly leads to the breakdown of communal forms of agricultural production.
Communities that farm either cooperatively or communally are strongly disadvantaged as
policies are shaped to encourage and support individually-owned, export-oriented farming
models. In El Salvador, for instance, farming and community cooperatives are breaking up
because official credit is only available to individual farmers, not to cooperatives. As a result,
much of the farmland is bought by wealthy elites or large, plantation-style agribusinesses, tearing
apart families and communities as members flock to urban centers looking for jobs.
Structural adjustment has also led to a concentration of land ownership, taking control of these
natural resources from local communities and placing it in the hands of transnational
corporations with little investment in protecting the local environment. As opportunities in rural
communities diminish, more and more families find themselves faced with the burden of
identifying new sources of income. Many become landless, migrant workers providing seasonal
labor to large plantations; others move to already crowded urban centers in search for jobs,
joining hundreds of other displaced workers.
A report on the performance of SAP in Senegal is a good point in case. A local nongovernmental
organization in Senegal (a country which has undergone 11 structural adjustment programs since
the 1980s), reported the soils are getting poorer and poorer, the government no longer provides
seeds on credit, and fertilizer has gotten very expensive. The few seeds that are available are
channeled to the men's farms as a matter of priority. When the men migrate from the village,

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they leave us alone to till the fields. To transport what little we produce to the market costs twice
as much since the devaluation.
Structural adjustment can also result in serious impacts to the environment. The switch to non-
traditional crop production almost always requires increased use of agricultural inputs. Cash
crops are often more susceptible to disease and pests, requiring chemicals in large volumes and
at high levels of toxicity.
The shift from growing a variety of crops to mono-cropping systems, common to export
production, further exacerbates the need for agricultural inputs, depletes soil of essential minerals
and nutrients, and decreases biological diversity (including beneficial insects that eliminate
pests). The transnational corporations that own these farmlands rarely have any stake in
protecting, preserving or establishing sustainable practices that will conserve natural resources
and prevent environmental contamination. As a result, dangerous application practices such as
aerial spraying of toxic pesticides are often used instead of safer ecological methods of pest
management. The World Bank and International Monetary Fund (IMF) claim that structural
adjustment of the agricultural sector can have a positive environmental impact, for instance, by
reducing pesticide use. It is true that removal of subsidies and devaluation of currency usually
has the net effect of increasing the price of chemical fertilizers and pesticides, putting them far
out of reach of small farmers. However, larger growers and foreign investors can purchase these
inputs without difficulty and their use of toxic chemicals generally goes up.
Furthermore, many structural adjustment programs require borrower governments to ease
environmental trade regulations, making them vulnerable to pesticide dumping. U.S. companies,
for example, have been able to off load their surplus pesticides (including those banned for use in
the U.S.) on developing countries as a result of these policies.
In general, SAP has created a situation where, in the course of rising agricultural exports and
corporate profits, Southern countries are witnessing falling food security, destruction of local
farming cultures and communities, impoverishment of rural families, and increasing
environmental degradation.
From the very beginning, the assumptions underlying SAP are criticized to be unrealistic. SAP
was intended to affect agriculture in two main ways:
1. By getting prices right, farmers would receive relatively high price and incentive. The
major instrument the WB emphasized was devaluation.

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 2. The demand for increased productivity along with the now higher purchasing power of
the farmers will lead to technological progress. Chemical and biological technologies
were given priority.
The assumptions underlying the above two channels are criticized as follows:
 The world market (export) prices remain reasonably stable. This assumption is rejected
by empirical evidences.
 Rises in export prices are transmitted to farmers. In reality, however, the gain could be
captured by the middle-men, taxes, and other transaction costs (say, costs of information
and transportation).
 Positive and smooth response of farmers to price rises. In the real situation of LDCs, the
supply of the commodities produced for all markets are highly price inelastic.
 Farmers use the additional income to invest in new technologies. But, most farmers are
found below the poverty line and thus the additional income is very likely to be used in
increasing consumption.
 Appropriate technology readily exists for adoption. Appropriate technologies to suit
farmers in LCDs don’t exist (at least without modifications).
In Africa,
 The WB and IMF wrongly diagnosed that African governments were biased against
agriculture. However, agriculture was highly supported through subsidies for the
purchases of modern inputs in the 1970s though the larger farmers had been the
beneficiaries.
 The agricultural sector of most African countries performed better under the strong states
of the 1970s than under SAP.

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Chapter summery
 Policy is well-defined as government actions aimed at changing economic behavior.
 Governments use Policies as instruments that to change economic outcomes, whereas
strategies of policy makers consist of sets of policies that are intended to improve
economic outcomes.
 Price policy is designed to influence the level and stability of the prices received by
farmers and paid by consumers for farm outputs.
 The marketing of farm output is typically thought to play a dual role. One dimension is
the transmission of price signals between consumers and producers.
 Input policy is designed to influence the prices and delivery systems of purchased
variable inputs used in farm production.
 Credit policy concerns mainly, but not exclusively, on the provision of working capital
for the purchase of variable inputs used in farm production.
 Mechanization policy is designed to influence the pace and direction of the adoption of
mechanical technologies, or farm fixed capital, by farmers.
 Land reform policy seeks to alter the ownership distribution or conditions of access to
land as a resource in farm production.
 Research and extension policy is concerned with the generation and diffusion of new
technology designed to increase the productivity of resources in farm production.
 The World Bank's mission is to fight poverty by providing resources, sharing knowledge,
building capacity, and creating partnerships in the public and private sectors.

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Review Question
1. Define Policy Analysis.
2. What are the four basic components of policy framework?
3. What are the fundamental goals of Policy Analysis? Briefly explain each of them.
4. What are the three major policies that affect agriculture? Describe them briefly.
5. What are the three major public investments that affect agriculture?
6. What is the importance of agricultural policies?
7. Why should the government provide investments in those public investment areas?
8. How was ‘Get prices right’ implemented in SAP?
9. Why were the assumptions of SAP unrealistic?

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Reference
1. Ghatak and Ingersent (1996). Agriculture in Economic Development, Cambridge
University Press, Cambridge.
2. Killik, I, (1993), the Adaptive Economics, World Bank, D, C.
3. Eicher, C.K and J.M. Staaz, eds, (1990). Agricultural Development in the Third World.
The Jhn Hopkins University Press.
4. Ellis, F. (1992). Agricultural Policy in Developing Countries, Cambridge: University
Press.
5. Tsakek, I. (1990) Agricultural Price Policy: A Practioner’s Guide to Partial Equilibrium
Analysis, Ithaca: Cornell University Press.
6. FAO (1991), Agricultural Price Policy: Government and Market, Training Materials No.
31 Rome.
7. Monke, E. and. R. Pearson (1989). The Policy Analysis Matrix for Agricultural,
Development, Ithaca; Cornell University Press.
8. Tomich, T. P. Kilby and B. Johnston (1995) Transforming Agrarian Economics
9. Hayami, Y. V. Ruttan (1995) Agricultural Development: An International Perspective.
The John Hopkins University Press, Baltimore.
10. Dejene Aredo (1995) “Agricultural Transformation: A Conceptual Framework”, in
Dejene Aredo and Mulat Demeke Ethiopian Agriculture: Problems of Transformation.
Addis Ababa University Press.
11. Dejene Aredo (1992) ‘Source of Agricultural Growth’ In Mekonnen Tadesse, ed. The
Ethiopian Economy, AAU Press.
12. Dejene Aredo (2001) Agricultural Growth, Population and Environment Nexus.
Proceedings of the 10th Annual Conference on the Ethiopian Economy.
13. “ The Role, Structure and Performance of Agriculture”. In UNCTAD, Trade and
Development Report, 1998.
14. “Food Security: Some Macroeconomic Dimensions” In FAO, The State of Food and
Agriculture 1996. (On Reserve at the FBE Library).
15. UN Publication “African Recovery” Vol. 16 No. 2-3)

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Home Doing Assignment! (50%)
1. Explain how agricultural sector plays a role and contribute to national economic
development. (5 pts.)
2. How do world economic conditions influence the contributions of agriculture to economic
development? (5 pts.)
3. How Agriculture is structurally transform and the structural change used in economics are
put into five main aspects. List and explain it. (5 pts.)
4. Why is agriculture a risky business to finance as opposed to the non-agricultural sectors like
the industry? (5 pts.)
5. Discuss how the high pay-off input model embraces the concepts of conservation, location,
and diffusion models of agricultural development. (5 pts.)
6. The diffusion model failed to generate substantial increase in farm output or modernization
of traditional agriculture, but would you suggest why? (5 pts.)
7. Compare and contrast the resource exploitation model with the resource conservation model?
And comment the superior desirability of each model to current Ethiopian development. (5
pts.)
8. Taking the real socio-economic conditions of your country, is the resource exploitation
model suitable to implement? What merits and demerits will be encountered? (5 pts.)
9. What is the purpose of agricultural research in developing countries? (5 pts.)
10. Discuss the objectives of agricultural policy in developing countries. (5 pts.)

END!

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