Chapter Two
ECONOMICS OF AGRICULTURAL DEVELOPMENT
Introduction
Agriculture is one of the most important sectors in national economic development. At the
national level, food security and consumption are headline indicators of human well-being and
some economists regard growth in agricultural productivity and incomes as indicators that
developing countries are building the conditions for sustainable economic growth.
Agricultural transformation:-
Means shift from highly diversified, subsistence-oriented production towards more
specialized market-oriented production.
It implies integration between the agriculture and the rest of economic sectors
Many functions formerly conducted on the farm, such as input production and output
processing, are shifted to off-farm elements of the economy.
Failure to invest adequately in agriculture can choke off the process of structural
transformation and hunger alleviation.
2.1 Structure of Agricultural System in Developing and Developed World
They are two types:-
The traditional and low productivity agriculture of third world countries and
The highly efficient and productive agriculture of the developed countries.
Developed Countries (DCs) Least Developed Countries (LDCs)
Highly efficient Inefficient
High output per worker Low productivity
Small number of farmers can feed entire nation Agricultural output can barely sustain farm population
Technological and biological improvements Technological stagnation
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2.2 The stages of agricultural transformation
The transformation agricultural in developing countries can be divided in to three stages.
Stage I: Subsistence farming ( Static)
The first is the pure, low-productivity, mostly subsistence-level peasant farm, still prevalent
in Africa.
Most output is produced for family consumption
The low-productivity is due to
I. Uses only traditional tools
II. Rapidly diminishing returns to increased labour inputs. manure and chemical
fertilizers have been not properly used.
III. Labour is scarce during the busiest part of the growing season, planting and weeding
times. At other times, much of the labour is underemployed.
Resistant to technological innovation due in part to the limited access to credit, insurance
and information:
Rigid social institutions, fragmented markets and reduced communication net-work
between rural areas and urban centres often inhibit the higher level of production.
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: 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: 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. The distinction between them underlies through the following
basis: i. 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. ii. Risk is based on decision makers’ personal degree
of belief about the occurrence of events. iii. Risk is based on the subjective problems
attached by farm decision makers to the likelihood of occurrence of different events.
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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.
Figure 1 illustration of how attitudes toward risk may militate against innovations.
MCR which is necessary for the farm family's physical survival.
Any output level below MCR would be catastrophic for the farmer and his family.
The upper, straight line represents the minimum level of food consumption desirable at
village consumption standards.
It is assumed that this line rises over time as the traditional societies are influenced by the
external factors.
Stage II: The Transition to Mixed or Diversified Farming
Might be called diversified or mixed family agriculture,
Production for consumption and a significant part for sale to the commercial sector
An intermediate step in the transition from subsistence to specialized production.
The staple crop no longer dominates farm output, and new cash crops such as fruits,
vegetables, coffee and tea are established, together with simple animal husbandry.
Use of better seeds, fertilizers, and simple irrigation to increase yields of staple crops , thus
Have a marketable surplus to sell and raise family’s consumption and farm investment.
Diversified farming can minimize the impact of staple crop failure and is security
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Farm success depend not only farmers ability but also on the social, commercial, and
institutional conditions eg credit, fertilizer, water, crop information, and marketing facilities.
Stage III: From Divergence to Specialization/Modern Commercial Farming ( Dynamic)
Modern farm, high-productivity, Production is entirely for the market .
Most prevalent type of farming in advanced industrial nations.
Basic goal: pure commercial profit and maximum per-hectare yields derived from
(irrigation, fertilizer, pesticides, hybrid seeds, etc.)
In most cases, use sophisticated labour-saving mechanical equipment
Rely upon economies of scale to reduce costs and maximization of profits: consumers get at
lower prices
Disadvantages
may create their monopolies. And consumers will be exploited.
Summary of major characteristics of agricultural transformation from stage I through stage II
and into stage III
General characteristic Stage I (static) Stage III (dynamic)
Values, attitudes, motivations Negative or resistant Positive or receptive
Goals of production Family consumption and survival Income and net profit
Technology or state of arts Static or traditional with no or slow Dynamic or rapid
innovation innovation
Degree of commercialization of farm Subsistence or semi subsistence Commercial
Production
Degree of commercialization of farm Family labour and farm produced Commercial
inputs
Factor proportions and rates of return High labour/capital ratio, low labour Low labour/capital ratio,
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return high labour return
Institutions affecting or serving Deficient and imperfect Available Efficient and well
agricultural and rural areas developed
Availability of unused agricultural Available Unavailable
resources
Share of agricultural sector in total Large Small
economy
2.3 Conditions for Agricultural Development
I. Technology and Innovation
In LDC increased output in earlier years was achieved extending cultivation into unused
lands. These opportunities have by now been exploited, and there is little scope for further
expansion.
Technical change is the source of most growth in productivity
o Biological-chemical innovations, such as hybrid seeds, fertilizers, and pesticides, all
tend to be yield-increasing and thus save on land.
o Mechanical technologies like tractors, harvesters and combiners are more suited for
large scale operations.
In LDC agricultural lands holdings are small, capital is scarce and labour is abundant.
The introduction of labour replacing and capital and land intensive mechanical
technologies will exacerbate the existing rural unemployment.
Higher productivity requires better soil and water management and scale neutral input
use.
II. Conducive institutional and pricing policies
Improved relevant technologies may not merely lead to agricultural development.
The complementary tasks, among others, includes adaptation and diffusion of the new
technology to actual farms, development of marketing infrastructures, dissemination of
information and creating access to credit and provision of complementary inputs such as
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water power, etc and institutional changes such as land reform (equitable distribution of
land)
III. Education
Expansion of education to farmers plays an important role in the success of extension
services: for applying new technology, and easily communicate with other stakeholders
in agriculture.
Many governments in developing nations, Farmers were paid prices below either world
competitive or free-market internal prices. With farm prices so low—in some cases
below the costs of production—there was no incentive for farmers to expand output or
invest in new productivity raising technology.
As a result, local food supplies continually fell short of demand, and many developing
nations, especially in sub-Saharan Africa, that were once self-sufficient in food
production had to import food.
Thus government must not only make the appropriate institutional and credit market
adjustments but also make continued progress to provide incentives for small and
medium size farmers by implementing pricing policies that truly reflect internal market
conditions.