Chapter 9: Agricultural

Transformation and Rural

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The Imperative of Agricultural Progress and Rural
Development
• Overly heavy emphasis on rapid industrialization may have had
negative impacts on rural development
• Agricultural development is now seen as an important part of any
development strategy
• Three complementary elements of an agriculture – and employment-
based strategy
• Accelerated output growth
• Rising domestic demand for agricultural output
• Non-agricultural labor intensive rural development activities that are
supported by the farming community

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Contributions of Agriculture to Economic
Development
• Product contribution
• Foreign exchange contribution
• Market contribution
• Factor contribution
• Labor contribution
• Capital contribution

9-3
As Countries Develop, the Shares of GDP and Labour in Agriculture Tend to
Decline, But With Many Idiosyncrasies

Note: The list of 3-letter codes and the countries they represent can be found in Table 2.1 on pp. 38–39 of this text.
Source: International Bank for Reconstruction and Development/World Bank, World Development Report, 2008. Reprinted with permission.
4
Cereal Yields by World Region, 1960–2005

Source: International Bank for Reconstruction and Development/World Bank, World Development Report, 2008. Reprinted with permission.

5
Agricultural Growth: Past Progress and Current
Challenges
• Malnutrition and famine inspire calls for a new green revolution
focused on Africa
• In 2017 the slow decline in the number of those classified as hungry
reversed course and again topped 800 million
• Food price spike of 2007-2008 partly due to short term factors, but
long term factors may herald return to persistently higher food prices in
the years ahead.
• Food prices have continued to be unstable since then
• Presence of market failures - and poverty alleviation goals – create
need for constructive government role in agriculture
• Impacts in 2020 of Covid-19 crisis on increasing the number of people
in hunger
6
World Prices for Agricultural Commodities, 1974–2012

Note: Prices are in real 2005 US dollars.

7
 Agricultural extension programs
• Agricultural extension involves demonstration and training services
for improving agricultural practices and increasing farm productivity
• Usually government-supported, frequently through universities
• US example: each state has a designated “land-grant university”
• Since 1887, government-supported agricultural experiment stations have
developed improved inputs and techniques
• Since 1914, their extension (outreach) agents have taught farmers new
developments
• In developing countries, extension services may also train farmers in
natural resources, health, nutrition, and sanitation practices.
• This reflects their potential complementarity with farming training
• Extension often through universities with government support, but
sometimes standalone government agencies, or NGOs

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 Agricultural extension programs (Continued)
• Extension services are credited with positive effects on productivity,
notably through introducing high-yielding crop varieties in many
countries
• Farmer Field Schools (FFSs): An approach originating in 1980s
Indonesia to provide participatory, learning-by-doing adult education
• Later, Junior FFSs
• However, in other countries, the extension services record is mixed,
at best
• Importance of recent innovations in extension in Africa

9
The Structure of Agrarian Systems in the
Developing World
• Three systems of developing country agriculture
• Agriculture based countries, often subsistence, but agriculture makes
up large part of growth
• Transforming countries, most of world’s rural people, a large
percentage of total poverty incidence found there, low contribution
of agriculture to growth
• Urbanized countries, half or more even of the poor found in urban
areas

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The Structure of Agrarian Systems in the
Developing World (Continued)
• Peasant Agriculture in Latin America, Asia, and Africa
• Latin America and Asia: similarities and differences
• The Latifundio–Minifundio dualistic pattern in Latin America
• The fragmented and heavily congested very small (“dwarf”)
land holdings in Asia
• Africa: extensive cultivation patterns

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

Note: Arrows show paths for Brazil, China, India, and Indonesia in previous periods. A triangle denotes predicted poverty data used. Country letter codes are found in Table 2.1 on pp. 43–44 of this text.
Source: International Bank for Reconstruction and Development/The World Bank, World Development Report, 2008. Reprinted with permission.

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The Structure of Agrarian Systems in the
Developing World (Continued)
• Transforming Economies: Problems of Fragmentation and
Subdivision of Peasant Land in Asia
• Impact of colonial rule in strengthening land tenure systems of
private property rights and the consequent rise of
moneylenders
• Contemporary landlordism in India and Pakistan involves
absentee landlordism and persistence of sharecroppers and
tenant farmers in some regions
• Rapid population growth resulted in more fragmentation and
peasant impoverishment

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

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The Structure of Agrarian Systems in the
Developing World (Continued)
• Subsistence Agriculture and Extensive Cultivation in Africa
• Low productivity due to lack of technology
• Shifting Cultivation
• Seasonal demand for labor depending on rainy season
• High dependence on unimproved seeds sown on unfertilized, rain-fed
fields
• Relatively high fraction of underutilized land
• High concern about climate change impact
• Need for an African new green revolution; there are hopeful signs that it
is getting underway

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 The Central Role of Women
• Women provide 60% to 80% of agricultural labor in
Africa and Asia, and 40% in Latin America
• Women work longer hours than men
• Government assistance programs still tend to reach
male farmers, much more than female farmers

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Microeconomics of Farmer Behavior and Agricultural Development
• Are “peasants” irrational? Answer: More often rational than many guess…
• Subsistence farming: risk aversion, uncertainty, and survival
• Traditional neoclassical model of profit maximization with certainty is not adequate
• Price, weather, and other uncertainty, along with limited access to credit and insurance (and even savings
vehicles), largely explains the extent of risk-averse behaviors observed
• Risk-averse subsistence farmers often prefer technologies that combine low mean-per-hectare with low
variance to alternative high yielding but higher risk technologies
• Risk aversion often plays a major role in sharecropping contracts
• Efforts to minimize risk and remove commercial and institutional obstacles to small farmer innovation necessary

• Generally, low income farmers are not more irrational than wealthy farmers; they are just
facing difficult constraints
• At same time, salient “behavioral economics” issues must be evaluated and taken into
account in a systematic manner

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Crop Yield Probability Densities of Two Different Farming Techniques

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 Issues in sharecropping: a long debate
• Intrinsically Inefficient due to poor incentives
• Monitoring approach verses Screening argument (if high ability then take pure rental)
• Empirical evidence confirming inefficiency (comparing same farmer, across contract types,
controlling for soil)
• Sharecropping as a compromise between two types of risk: to landowner (worker shirks); to
tenant (a bad year)
• So we can explain sharecropping as ‘the best we can do under constraints,’ but that does make
it inevitable, ‘good,’ or enforcement
• Sharecropping might be unnecessary if not for the high inequality that underlies it
• The enormous efficiency loss is not negated by this important two-risks explanation of why
sharecropping arises
• Giving sharecroppers a larger share of the produce and security of tenure on land can increase
efficiency
• Land reform

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Incentives under Sharecropping

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The Microeconomics of Farmer Behavior and Agricultural
Development (Continued)
• The Transition to Mixed and Diversified Farming
• From Divergence to Specialization: Modern Commercial Farming
• Shifts may require supportive policy (government or NGOs); i.e.,
farmers may be unable to take advantage of these opportunities in
response market forces alone

21
 Example of non-strictly diminishing returns in some
activities of poor Two techniques - one more productive,
but requiring a fixed cost

*Notes: Utilizing x-axis to represent differing combined asset indices. Alternatively this could be represented as a two-humped function. Better-off may have complementary inputs. Marginal return
plausibly higher for better-off. Multiple equilibria possible given assumptions

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Potential Roles for Government in Agricultural
Development – Addressing Market Failure
• Reducing environmental externalities
• Implementing agricultural research and extension services to overcome information and
education market failures
• Helping to create markets where they are missing – e.g. for weather insurance or credit
• Addressing monopoly power in input supply
• Addressing monopsonistic power where it persists in local labor markets – and output
markets
• Helping to achieve economies of scale in marketing
• Overcoming informational asymmetries in product quality
• Providing needed infrastructure
• Maintaining/enforcing good institutions - in sense of Ch. 2, systematically applied to rural
areas including reform as needed
• Ensure shared growth in agriculture sector (merit good)
• Addressing poverty traps (merit goods)
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Core Requirements of a Strategy of Agricultural and
Rural Development
• Improving Small-Scale Agriculture
• Agricultural extension programs
• Technology and innovation
• Institutional and pricing policies: Providing necessary economic incentives
• Adapting to new opportunities and new constraints
• Conditions for Rural Development
• Land Reform
• Supportive polices
• Integrated Development Objectives

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 Land Reform
• Land reform: A deliberate attempt to reorganize and transform agrarian
systems with intention of fostering more equal distribution of
agricultural incomes and facilitating rural development
• Transfer of land ownership or control to the people who actually work
the land
• Historically strong resistance by landowners even when provided ‘fair
market value’ compensation
• To be effective, needs active agricultural extension for needed training,
inputs, marketing

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Discussion Question
• It is sometimes asserted that small, traditional (peasant) farmers are
backward and ignorant because they seem to resist agricultural
innovations that could raise farm yields substantially. Does this
resistance stem from an inherent irrationality on their part, or might
it be attributable to some other factors often overlooked by
traditional economic analysis? Explain your answer.