CHAPTER FOUR

Agriculture and Economic Development

Prepared by Dejen F.

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DTU/COBE/DOE /2018/2026
 4.1 Agricultural Progress and Rural Development

• "Agriculture not only gives riches to a nation, but the only riches she can call her own“.
Samuel Johnson.
• "Without agriculture it is not possible to have a city, stock market, banks, university,
church or army" Allan Savory.
• "Smallholders are the ones who put food on our tables... In the end, they will be the ones
to propel the economic growth and development of Africa in the 21st century“.
Kofi Annan Foundation.
• "Agricultural growth is particularly important for poverty reduction and food security in
developing countries“.
Food and Agriculture Organization (FAO) 2
• Main questions, need to be asked about agricultural and rural development as it relates to overall
national development.
• 1. How can agricultural output and productivity per capita be increased to benefit small farmers,
landless workers, and ensure food security while supporting urban growth?
• 2. How can traditional low-productivity farms be transformed into modern, high-productivity
commercial farms?
• 3. When farmers resist change, are they irrational, or responding rationally to their economic
conditions?
• 4. How do risks affect farmers in low-income countries, how do they cope, and what policies can
reduce these risks?
• 5. Are price incentives alone enough to increase agricultural output, or are institutional and structural
reforms also needed?
• 6. Is increasing agricultural productivity enough to improve rural livelihoods, or are off-farm jobs and
better social services also necessary?
• 7. How can countries effectively achieve national food security?
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• If development is to take place and become self-sustaining, it will have to include the rural
areas in general and the agricultural sector in particular.
• The core problems of widespread poverty, growing inequality, and rapid population growth
all originate in the stagnation and often retrogression of economic life in rural areas,
particularly in Africa.
• Traditionally in economic development, agriculture has been assumed to play a passive
and supportive role.
• Agriculture is the backbone of our nation. Without farmers, there is no food, no growth,
and no development.
• Its primary purpose was to provide sufficient low-priced food and manpower to the
expanding industrial economy, which was thought to be the dynamic “leading sector” in any
overall strategy of economic development.
• Agriculture is not just a sector; it is the foundation of economic development and social
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stability.
• The agricultural sector in particular and the rural economy in general must play an
indispensable part in any overall strategy of economic progress, especially for the low-
income developing countries.

• An agriculture and employment-based strategy of economic development requires three

basic complementary elements.
• 1. Accelerated output growth through technological, institutional, and price incentive
changes designed to raise the productivity of small farmers.
• 2. Rising domestic demand for agricultural output derived from an employment-oriented
urban development strategy.
• 3. Diversified, nonagricultural, labor-intensive rural development activities that directly and
indirectly support and are supported by the farming community. 5
4.2 The Structure of Agrarian Systems in the Developing World

•A first step toward understanding what is needed for further agricultural and rural
development progress is a clear perspective of the nature of agricultural systems in
diverse developing regions and, the economic aspects of the transition from
subsistence to commercial agriculture.
• First, countries where agriculture is still a major source of economic growth mainly
because agriculture makes up a large share of GDP.
• World Bank estimates that agriculture accounts for some 32% of GDP growth on
average in these countries, in which 417 million people live, more than 2/3 of these
live in rural areas includes Sub-Saharan Africa , Laos, Senegal, etc.
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• Second, Transforming countries,- some 2.2 billion almost 80% on average rural poor but
agriculture now contributes only a small share to GDP growth (7% on average).

• Most of South & East Asia, N. Africa, Middle East, along with some outliers such as
Guatemala.

• Third, Urbanized countries, high rural urban migration nearly half, or more, of the poor are
found in cities, and agriculture contributes even less to output growth.

• Largely found in Latin America and Caribbean, along with developing eastern Europe and
Central Asia, and contain about 255 million Rural dwellers.
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Agrarian patterns in Latin America: Progress and remaining Poverty Challenges

• In Latin America, as in Asia and Africa, agrarian structures are not only part of the
production system but also a basic feature of the entire economic, social, and political
organization of rural life.
• The agrarian structure that has existed in Latin America since colonial times and is still
widespread in a substantial part of the region is a pattern of agricultural dualism known as
latifundio-minifundio.
• Latifundios are very large land holding. They are usually defined as farms large enough to
provide employment for more than 12 people, though some employ thousands.
• In contrast, minifundios are the smallest farms. They are defined as farms too small to
provide employment for a single family (two workers) with the typical incomes, markets, and
levels of technology and capital prevailing in each country or region. 8
• Evidence from a wide range of developing countries, demonstrates that smaller farms are
more efficient producers of most agricultural commodities.
• A major explanation for the relative economic inefficiency of farming the fertile land on
the latifundios is simply that the wealthy landowners often value these holdings not for
their potential contributions to national agricultural output but rather for the considerable
power and prestige that they bring.
• Much of the land is left idle or farmed less intensively than on smaller farms.
• Latifundio transaction costs, especially the cost of supervising hired labor, are much
higher than the low effective cost of using family labor on family farms or minifundios.
• Transaction costs of doing business related to gathering information, monitoring,
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establishing reliable suppliers, formulating contracts, obtaining credit, and so on.
 Transforming Economies: Problems of Fragmentation and Subdivision of
Peasant Land in Asia
• If the major agrarian problem of Latin America, at least in traditional areas, can be identified as too
much land under the control of too few people. The basic problem in Asia is one of too many people
crowded onto too little land.
• The land is distributed more equally in Asia than in Latin America but still with substantial levels of
inequality. Throughout much of the 20th century, rural conditions in Asia typically deteriorated.
• Nobel laureate Gunnar Myrdal identified three major interrelated forces that molded the traditional
pattern of land ownership into its present fragmented condition:
1. The intervention of European rule
2. The progressive introduction of monetized transactions and the rise in power of the money lender,
and
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3. The rapid growth of Asian populations.
• The traditional Asian agrarian structure before European colonization was organized
around the village.
• Local chiefs and peasant families each provided goods and services produce and labor
from the peasants to the chief in return for protection, rights to use community land, and
the provision of public services.
• The arrival of the Europeans led to major changes in the traditional agrarian structure,
some of which had already begun.
• As Myrdal points out, “Colonial rule acted as an important catalyst to change, both directly
through its effects on property rights and indirectly through its effects on the pace of
monetization of the indigenous economy and on the growth of population.”
• In the area of property rights, European land tenure systems of private property ownership
were both encouraged and reinforced by law. 11
Subsistence Agriculture and Extensive Cultivation in Africa
• Subsistence farming on small plots of land is the way of life for the majority of African people
living in agriculture-based economies.
• The great majority of farm families in tropical Africa still plan their output primarily for their
own subsistence. The basic variable input in African agriculture is farm family and village
labor, African agriculture systems are dominated by three major characteristics:
• 1. The importance of subsistence farming in the village community
• 2. The existence of some though rapidly diminishing land in excess of immediate
requirements, which permits a general practice of shifting cultivation and reduces the value of
land ownership as an instrument of economic and political power.
• 3. The rights of each family in a village to have access to land and water in the immediate
territorial vicinity, excluding from such access use by families that do not belong12 to the
community even though they may be of the same tribe.
• Where traditional systems are breaking down, inequality is often increasing further.
• The low-productivity subsistence farming characteristic of most traditional African
agriculture results from a combination of three historical forces restricting the growth of
output:
• 1. In spite of the existence of some unused and potentially cultivable land, only small areas
can be planted and weeded by the farm family when it uses only traditional tools.
• 2. Given the limited amount of land that a farm family can cultivate in the context of a
traditional technology, these small areas tend to be intensively cultivated.
• As a result, they are subject to rapidly diminishing returns to increased labor inputs. In such
conditions, shifting cultivation is the most economic method of using limited supplies of
labor on extensive tracts of land.
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• 3. Labor is scarce during the busiest part of the growing season, planting and weeding
times.

• At other times, much of the labor is underemployed. Because the time of planting is
determined by the onset of the rains and because much of Africa experiences only one
extended rainy season, the demand for workers during the early weeks of this rainy
season usually exceeds all available rural labor supplies.

• The net result of these three forces had been slow growth in agricultural labor
productivity throughout much of Africa.
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 4.3 The Important Role of Women in Agriculture

• A major and until recently often overlooked feature of agrarian systems in the developing
world is the crucial role played by women in agricultural production.
• InAfrica, where subsistence farming is predominant and shifting cultivation remains
important, nearly all tasks associated with subsistence food production are performed by
women.
• Although men who remain home generally perform the initial task of cutting trees and
bushes on a potentially cultivable plot of land, women are typically responsible for all
subsequent operations, including removing and burning felled trees, sowing or planting the
plot, weeding, harvesting, and preparing the crop for storage or immediate consumption.

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• Women do much of the labor for cash crop production, cultivate food for household
consumption, raise and market livestock, generate additional income through cottage
industries, collect firewood and water, and perform household chores, including the
processing and cooking of food.
• Due to the time-consuming nature of their diverse responsibilities and no doubt to their
limited household bargaining power women tend to work longer hours than their male
counterparts.
• A traditional economics assumption following Nobel laureate Gary Becker has been that
households cooperate to maximize effectively shared objectives: the “unitary household”
model.
• Development economics research has found that households engage in extensive bargaining,
sometimes to the point where higher incomes would be possible if husbands and wives
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cooperate more extensively.

• Women produce a large share of agricultural output, and supply a large share of the labor a
share that has actually been increasing over time successful agricultural reform will require
raising women’s productivity and ensuring that gender-specific policies are at the core of
rural development strategy.
• Women make an important contribution to the agricultural economy through the labor
they supply in the cultivation of cash crops.
• Thoughthe production and profits from commercial crops are generally controlled by
men, women are usually responsible for the strenuous jobs of weeding and transplanting.
• In addition to commercial crops, women frequently cultivate small vegetable gardens that
provide food for family consumption.
• Though the cash value of produce from these gardens may be small, it often represents an
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important component of the total resources available to women.
• Women’s work in the low-income household involves a range of demanding tasks including
processing and pounding raw grains, tending livestock, cooking, and caring for children.
• The structure of agriculture is becoming more commercialized, women’s roles and hence their
economic status are changing.
• In many developing regions, women are still unremunerated for the long hours they contribute to
the tending of commercial crops.
• As revenue-generating cash cropping rises in importance, the proportion of resources controlled by
women tends to diminish.
• New crops and technologies will be more effective where patterns of production are consistent with
the interests of female household members.
• Because the active participation of women is critical to agricultural prosperity, policy design should
ensure that women benefit equally from development efforts. 18
4.4 The Economics of Agricultural Development

• For expository convenience, we can identify three broad stages in the evolution of
agricultural production.
• First stage and most primitive is the pure, low-productivity, mostly subsistence-level,
peasant farm.
• Second stage is what might be called diversified or mixed\family agriculture, where part
of the produce is grown for consumption and part for sale to the commercial sector.
• Third stage represents the modern farm, exclusively engaged in high-productivity
specialized agriculture geared to the commercial market.
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• Agricultural modernization in mixed-market developing economies may be described in
terms of the gradual but sustained transition from subsistence to diversified and
specialized production.
• But such a transition involves much more than reorganizing the structure of the farm
economy or applying new agricultural technologies.
• In most traditional societies, agriculture is not just an economic activity; it is a way of life.
• Any government attempting to transform its traditional agriculture must recognize that in
addition to adapting the farm structure to meet the demand for increased production,
profound changes affecting the entire social, political, and institutional structure of rural
societies will often be necessary.
• Agriculturaldevelopment will either never get started or, more likely, simply widen the
already sizable gap between the few wealthy large landholders and the masses of
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impoverished tenant farmers, smallholders, and landless laborers.
Subsistence Farming: Risk Aversion, Uncertainty, and Survival

• On the classic peasant subsistence farm most output is produced for family consumption
(although some may be sold or traded in local markets), and a few staple food crops are the
chief sources of food intake.
• Output and productivity are low, and only the simplest traditional methods and tools are
used.
• Capital investment is minimal land and labor are the principal factors of production.
• The law of diminishing returns is in operation as more labor is applied to shrinking parcels
of land.
• The failure of the rains, the appropriation of his land, and the appearance of the
moneylender to collect outstanding debts are the banes of the peasant's existence and21 cause
him to fear for his survival.
• Labor is underemployed for most of the year, although workers may be fully occupied at
seasonal peak periods such as planting and harvest.
• The peasant usually cultivates only as much land as his family can manage without the need
for hired labor, although many peasant farmers intermittently employ one or two landless
laborers.
• Throughout much of the developing world, agriculture is still in this subsistence stage. But
in spite of the relative backwardness of production technologies and the misguided
convictions of some foreigners who attribute the peasants' resistance to change as a sign of
incompetence or irrationality, the fact remains that given the static nature of the peasants'
environment, the uncertainties that surround them, the need to meet minimum survival
levels of output.
• The rigid social institutions into which they are locked, most peasants behave in an eco-
nomically rational manner when confronted with alternative opportunities. 22
• The traditional two-factor neoclassical theory of production where land (and perhaps capital)
is fixed and labor is the only variable input provides some insight into the economics of
subsistence agriculture.
• Specifically, it provides an economic rationale for the observed low productivity of traditional
agriculture in the form of the law of diminishing marginal productivity.
• Unfortunately, this theory does not satisfactorily explain why peasant agriculturalists are often
resistant to technological innovation in farming techniques or to the introduction of new seeds
or different cash crops.
• According to the standard theory, a rational income or profit-maximizing farm or firm will
always choose a method of production that will increase output for a given cost (in this case,
the available labor time) or lower costs for a given output level.
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• Subsistence agriculture is thus a highly risky and uncertain venture. It is made even more so
by the fact that human lives are at stake.
• In regions where farms are extremely small and cultivation is dependent on the uncertainties
of variable rainfall, average output will be low, and in poor years the peasant and his family
will be exposed to the very real danger of starvation.
• In such circumstances, the main motivating force in the peasant's life may be the
maximization not of income but rather of his family's chances of survival.
• When risk and uncertainty are high, a small farmer may be very reluctant to shift from a
traditional technology and crop pattern that over the years he has come to know and
understand to a new one that promises higher yields but may entail greater risks of crop
failure. 24
• When sheer survival is at stake, it is more important to avoid a bad year (total crop failure)
than to maximize the output in better years.
• In the jargon of economic statistics, risk-avoiding peasant farmers are likely to prefer a
technology of food production that combines a low mean per-hectare yield with low
variance to alternative technologies and crops that may promise a higher mean yield but
also present the risk of a greater variance.
• Many programs to raise agricultural productivity among small farmers in Africa and
elsewhere have suffered because of failure to provide adequate insurance (both financial
credit and physical “buffer” stocks) against the risks of crop shortfalls, whether these risks
are real or imagined.
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• In many parts of Asia and Latin America, a closer examination of why peasant farmers have
apparently not responded to an "obvious" economic opportunity will often reveal that:
• 1. The landlord secured all the gain,
• 2. The moneylender captured all the profits,
• 3. The government's "guaranteed" price was never paid,
• 4. Complementary inputs (fertilizers, pesticides, assured supplies of water, adequate non-
usurious credit, etc.) were never made available or their use was otherwise more problematic
than outsiders understood.
• Farmers will consider the expected value of the marginal product of any inputs they apply,
such as fertilizer, which will be lowered in relation to the probability they place on
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expropriation
The Economics of Sharecropping and Interlocking Factor Markets

• The phenomenon of risk aversion among peasant farmers in the presence of high land
inequality also helps explain the prevalence of sharecropping throughout much of Asia
and parts of Latin America.
• Although different types of relationships may arise between the owners of land and the
people who work on them (e.g., the farmers could rent or act as wage laborers),
sharecropping is widespread.
• Sharecropping occurs when a peasant farmer uses the landowner’s farmland in exchange
for a share of food output, such as half of the rice or wheat grown.
• The landlord’s share may vary from less than a third to more than two-thirds of output,
depending on local labor availability and the other inputs (such as credit, seeds, 27and
tools) that the landlord provides.
• The poor incentive structure of sharecropping lends itself to inefficiency.
• Alfred Marshall observed that the farmer was in effect paid only part, rather than all, of his
marginal product and would rationally reduce work effort accordingly. This effect can be
seen graphically in Figure 4.1.

• Labor input is found along the X-axis, which may be interpreted as number of hours of
work, or of total effort; output per unit of labor is found along the Y-axis.
• Interlockingfactor markets factor markets whose supply functions are interdependent,
frequently because different inputs are provided by the same suppliers who exercise
monopolistic or oligopolistic control over resources. 28
Figure 4.1 Incentives under sharecropping

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• A farmer who owned his own farm would work until his value marginal product of labor
(VMPL) was equal to his alternative wage, or opportunity cost of labor, WA, and so
would put in an efficient amount of labor effort LF.
• However, a sharecropper receives only a fraction, γ, of his effort; for example, under
50–50 sharecropping, the sharecropper’s share would be γ = 0.5.
• Thus the sharecropper would receive only γ of his value marginal product, or γVMPL
As a result, the sharecropper would have an incentive to put in an inefficiently low level
of effort LS, as seen in Figure 4.1.
• This view was challenged in the 1960s by Steven Cheung, who argued that profit-
maximizing landlords would establish contracts requiring adequate work effort from the
tenant as well as stipulating each party’s share of the output. 30
• If, as Cheung argued, effort is not too difficult to monitor, then if one tenant failed to live
up to his part of the bargain, he would be replaced by another tenant who was willing to
work harder; as a result, sharecropping would be as efficient as any other contractual form.
• Cheung’s theory is known as the monitoring approach, in contrast to the Marshallian
approach to the analysis of sharecropping illustrated in above figure 4.1; Cheung argued
that labor effort LF would also obtain under sharecropping.
• The monitoring approach was popular for two decades, and it was difficult to test because
of endogeneity.
• For example, only low-productivity people may choose to enter into sharecropping
contracts.
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• In fact, some scholars believe that landlords may offer tenants an option of either
sharecropping or pure rental contracts precisely because higher-ability people more often
choose pure rental arrangements.
• High-ability farmers are able to get the full value of their high marginal product, while this is
not as attractive to lower-ability farmers.
• If landlords are not sure which farmers have high ability, they may find out by observing which
ones choose the pure rental contract.
• The motivation may be to enable landlords to squeeze more profits out of the renters,
charging higher effective rents for pure rental contracts than for sharecropping contracts but
not too high or even high-ability farmers would choose sharecropping.
• This approach is known as the screening hypothesis of sharecropping. 32
 The Transition to Mixed and Diversified Farming

• It is neither realistic nor necessarily desirable to think of instantly transforming a traditional

agrarian system that has prevailed for many generations into a highly specialized commercial
farming system.
• Attempts to introduce cash crops indiscriminately in subsistence farms have more often than
not resulted in the peasants' loss of land to moneylenders or landlords.
• Subsistence living is merely substituted for subsistence production.
• For small farmers, exclusive reliance on cash crops can be even more precarious than pure
subsistence agriculture because the risks of price fluctuations are added to the uncertainty of
nature.
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• Diversified or mixed farming therefore represents a logical intermediate step in the transition
from subsistence to specialized production.
• In this stage, 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.
• These new activities can take up the normal slack in farm workloads during times of the year
when disguised unemployment is prevalent.
• This is especially desirable in many developing nations where rural labor is abundantly avail-
able for better and more efficient use.
• For example, if the staple crop occupies the land during only parts of the year, new crops can
be introduced in the slack season to take advantage of both idle land and family labor.
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• Where labor is in short supply during peak planting seasons, as in many parts of Africa,
simple laborsaving devices (such as small tractors, mechanical seeders, or animal-operated
steel plows) can be introduced to free labor for other farm activities.
• The use of better seeds, fertilizer, and simple...irrigation to increase the yields of staple
crops like wheat, maize, and rice can free part of the land for cash crop cultivation while
ensuring an adequate supply of the staple food.
• The success or failure of such efforts to transform traditional agriculture will depend not
only on the farmer's ability and skill in raising his productivity but, even more important, on
the social, commercial, and institutional conditions under which he must function.
• Specifically, if he can have a reasonable and reliable access to credit, fertilizer, water, crop
information, and marketing facilities.
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• If he receives a fair market price for his output; and if he can feel secure that he and his
family will be the primary beneficiaries of any improvements, there is no reason to assume
that the traditional farmer will not respond to economic incentives and new opportunities
to improve his standard of living.
• Lack of innovation in agriculture, as noted earlier, is usually due not to poor motivation or
fear of change but to inadequate or unprofitable opportunities.
• Evidence from such diverse some countries under the proper conditions, small farmers are
responsive to price incentives and economic opportunities and will make radical changes in
what they produce and how they produce it.
• In Africa, lack of information is often a constraint, but farmers learn from each other when
valuable new crops and techniques are introduced locally.
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From Divergence to Specialization: Modern Commercial Farming

• The specialized farm represents the final and most advanced stage of individual holding in
a mixed market economy.
• It is the most prevalent type of farming in advanced industrial nations.
• It has evolved in response to and parallel with development in other areas of the national
economy.
• General rises in living standards, biological and technical progress, and the expansion of
national and international markets have provided the main impetus for its emergence and
growth.
• In specialized farming, the provision of food for the family with some marketable surplus
is no longer the basic goal. 37
• Instead, pure commercial profit becomes the criterion of success, and maximum per-hectare
yields derived from synthetic (irrigation, fertilizer, pesticides, hybrid seeds, etc.) and natural
resources become the object of farm activity.
• Production, in short, is entirely for the market. Economic concepts such as fixed and variable
costs, saving, investment and rates of return, optimal factor combinations, maximum
production possibilities, market prices, and price supports take on quantitative and qualitative
significance.
• The emphasis in resource utilization is no longer on land, water, and labor as in subsistence
and often mixed farming.
• Instead, capital formation, technological progress, and scientific research and development
play major roles in stimulating higher levels of output and productivity.
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4.4.1 Special Features of Agriculture

• Agriculture has several unique characteristics that distinguish it from other sectors like
industry and services.
• These features are important for understanding agricultural economics and rural
development:
• Dependence on Nature Agriculture heavily relies on natural factors such as rainfall, climate,
soil quality, and seasons.
• Unlike industries, farmers cannot fully control production condition
• Seasonality of Production. Agricultural production follows seasonal patterns. Crops are
planted and harvested at specific times of the year, leading to periodic income rather than
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continuous flow.
• Perishability of Output. Most agricultural products (like fruits, vegetables, milk) are highly
perishable and must be consumed or sold quickly, which affects pricing and storage.

• Biological Nature of Production. Agriculture involves living organisms (plants and animals),
meaning production depends on biological growth processes that take time and are
uncertain.

• Land as a Fixed Factor. Land is a primary input in agriculture and its supply is fixed.
• Its quality varies from place to place, affecting productivity

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• Small and Fragmented Holdings. In many developing countries, farms are small and
scattered, making it difficult to use modern machinery and achieve economies of scale.

• Low Elasticity of Demand. Demand for food products does not increase much with income
growth because food is a basic necessity. This can lead to price fluctuations when supply
changes.

• High Risk and Uncertainty. Agriculture faces risks from weather conditions, pests, diseases,
and price instability, making farmers’ incomes uncertain.

• Labor-Intensive Nature . Agriculture often requires a large amount of labor, especially in

traditional farming systems. 41
4.4.2 Role of Agriculture in Economic Development

• Based on structural transformation theories and Kuznets' findings, agriculture contributes

to development in four major ways
• Product Contribution. Agriculture meets the rising demand for food from the expanding
urban industrial population.
• It also provides essential raw materials for manufacturing, such as cotton for textiles and
agricultural products for food processing
• 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.

42
• Foreign Exchange Contribution: Agricultural exports are crucial for developing countries to
earn foreign exchange, which can then be used to import capital goods.

• In many developing nations, the agricultural sector is a major source of foreign exchange,
sometimes accounting for a vast majority up to 90% of foreign exchange earnings.

• Increased agricultural production and exports strengthen the balance of payments, which
helps stabilize or appreciate the local currency against foreign currencies.

• The Market Contribution A rise in rural purchasing power, as a result of the increased
agricultural surplus there is a great stimulus to increased development.
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• 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. 44
• The Factor Contribution 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.

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• 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.

• The non-agricultural sectors require funds for acquiring material capital.

• In the initial stages of their development, these funds will be generated in the agricultural
sector and then transferred to the other sectors.

• In a closed economy in the initial stages, it is the agricultural sector which commands most
of the income, capital and also labour.
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4.4.3 Constraints of Agricultural Productivity

Agricultural productivity is influenced by multiple factors, and several constraints limit the
efficiency and output of agriculture. These constraints can be categorized into natural,
economic, technological, institutional, and social factors.
• 1. Pressure of Population on Agriculture: The high man-land ratio in the developed
countries of the world is contrasted by low man-land ratio in the developing countries (of
Asia in particular). Overcrowding in agriculture has resulted in fragmentation of
landholdings and pseudo- unemployment in agriculture.
• 2 Rural Environment: The developing countries are characterized by mass illiteracy and a
conservative, superstitious social atmosphere in rural areas.
• The farmers, in general, are also reluctant to use modern methods of agriculture.
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• 3. Role of Non-farm Services: Non-farm services such as finance, marketing, etc. influence
agricultural productivity.
• In developed economies, vigorous governmental backing to farmers in the form of credit
and crop insurance, for instance, has insulated them from the risks of a market economy.
On the other hand, the presence of intermediaries in agriculture has harmed the economies
of developing countries to a great extent.
• Lack of credit facilities: Farmers often cannot access affordable loans for inputs.
• High cost of inputs: Seeds, fertilizers, and machinery may be expensive and unaffordable.
• Market limitations: Poor access to markets reduces farmers’ incentives to produce more.

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• 4 Size of Holdings: The highly populated countries of Asia are characterized by low to very
low per capita landholdings, which hamper mechanization.

• Moreover, small holdings cause great wastage of time, labour and cattle.

• Moreover, adopting scientific methods of cultivation and application of HYV seeds is

impossible in small holdings.

• Unclear land ownership or small fragmented plots reduce investment in land improvement.
• Farmers may lack guidance on best practices.

• Inconsistent agricultural policies or lack of support can hinder productivity.

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 4.4.4 Agricultural Strategies and the Role of the Government in the
Agricultural sector
• If the major objective of agricultural and rural development in third world nations is the
progressive improvement in rural levels of living achieved primarily through increases in
small farm incomes, output, and productivity, it is important to identify the principal sources
of agricultural progress and the basic conditions essential to its achievement.
• Improving Small-Scale Agriculture
• Technology and Innovation. In most developing countries, new agricultural technologies and
innovations in farm practices are preconditions for sustained improvements in levels of
output and productivity.
• Two major sources of technological innovation can increase farm yields. Unfortunately, both
have somewhat problematic implications for less developing countries agricultural
development. 50
• The first is the introduction of mechanized agriculture to replace human labor.
• The introduction of labor saving machinery can have a dramatic effect on the volume of
output per worker, especially where land is extensively cultivated and labor is scarce.
• One man operating a huge combine harvester can accomplish in a single hour what would
require hundreds of workers using traditional methods.
• In the rural areas of most developing nations where land parcels are small, capital is scarce,
and labor is abundant, the introduction of heavily mechanized techniques is not only often
ill suited to the physical environment but, more important, often has the effect of creating
more rural unemployment without necessarily lowering per-unit costs of food production.
• The second sources are biological (hybrid seeds), water control (irrigation), and chemical
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(fertilizer, pesticides, insecticides, etc.) innovations.
• They are land-augmenting; that is, they improve the quality of existing land by raising yields
per hectare. Only indirectly do they increase output per worker.
• Improved seeds, advanced techniques of irrigation and crop rotation; the increasing use of
fertilizers, pesticides, and herbicides; and new developments in veterinary medicine and
animal nutrition represent major scientific advances in modern agriculture.
• These measures are technologically scale-neutral; they can be applied equally effectively on
large and small farms.
• They do not necessarily require large capital inputs or mechanized equipment.
• They are therefore particularly well suited for tropical and subtropical regions, and offer
enormous potential for raising agricultural output in developing nations and have been
highly effective in doing so, particularly in Asia.
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• Institutional and Pricing Policies: Providing the Necessary Economic Incentives. The new
hybrid "miracle seeds" varieties of wheat, corn, and rice, together with needed irrigation and
chemicals (often collectively referred to as the green revolution) are scale-neutral and thus
offer the potential for small farm progress, the social institutions and government economic
policies that accompany their introduction into the rural economy often are not scale-
neutral.
• On the contrary, they often merely serve the needs and vested interests of the wealthy land
owners.
• Large landowners, with their disproportionate access to these complementary inputs and
support services, are able to gain a competitive advantage over smallholders and eventually
drive them out of the market.
• Large-scale farmers obtain access to low-interest government credit, while smallholders are
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forced to turn to moneylenders.
• Another critical area calling for major improvements in government policies relates to the
pricing of agricultural commodities, especially food grains and other staples produced for
local markets.
• 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.
• 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 the balance of their food needs.
• This caused further strains on their international balance of payments situation and
contributed to the worsening foreign-exchange and international debt crisis of the 1980s.
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• Adapting to New Opportunities and New Constraints. As a route out of poverty and toward
genuine rural development, enhanced cereal productivity (the classic green revolution
characteristic) represents only a small part of the agricultural opportunities.
• The best opportunities for sales to growing urban areas are generally found in higher value-
added activities, particularly horticulture (fruits, vegetables, and cut flowers) and
aquaculture.
• These products, along with organic and perhaps fair trade versions of some otherwise
traditional developing country exports such as coffee and spices, also provide good
opportunities for higher-value exports.
• But
small farmers will need special organization and assistance to take advantage of new
opportunities.
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• In2008 World Development Report concluded, Smallholders can bargain better as a
group than as individuals. So a high priority is to facilitate collective action through
producer organizations to reach scale in marketing and bargain for better prices. Otherwise,
the risk is large that these developments will benefit mainly the larger farmers.
• One of the biggest constraints looking ahead is the looming environmental problems
driven by global warming and climate change, which are expected to most negatively affect
sub-Saharan Africa and South Asia.
• Smaller and poorer farmers are likely to be affected severely, because of their lower access
to irrigation and other inputs and generally lesser capacity to adapt although, ironically, with
their smaller use of irrigation and different crop mix, their absolute income declines may be
less than those of richer farmers. 56
 Conditions for Rural Development
• We can draw three propositions that in essence constitute the necessary conditions for the realization
of a people-oriented agricultural and rural development strategy.
• Land Reform. Proposition 1: Farm structures and land tenure patterns must be adapted to the dual
objectives of increasing food production and promoting a wider distribution of the benefits of agrarian
progress.
• A Food and Agriculture Organization (FAO) report concluded that in many developing regions, land
reform remains a prerequisite for development. The report argued that such reform was more urgent
today than ever before, primarily because
• 1. Income inequalities and unemployment in rural areas have worsened,
• 2. Rapid population growth threatens to exacerbate existing inequalities, and
• 3. Recent and potential technological break through in agriculture (the Green Revolution) can be
exploited primarily by large and powerful rural landholders and hence can result in an increase
57 in their

power, wealth, and capacity to resist future reform.

• Unfortunately, very small or landless farmers cannot directly purchase land from the big
landowners because of market failures.

• Credit markets do not function well enough to provide a potentially efficient family farmer
with a loan; even if they did, the price of latifundio and other estate and plantation land is
too high because land ownership confers many benefits beyond the income from farming
activities, such as disproportionate political influence.

• If programs of land reform can be legislated and effectively implemented by the

government, the basis for improved output levels and higher standards of living for rural
peasants will be established.
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• Supportive Policies Proposition 2: The full benefits of small-scale agricultural development
cannot be realized unless government support systems are created that provide the
necessary incentives, economic opportunities, and access to needed credit and inputs to
enable small cultivators to expand their output and raise their productivity.
• Though land reform is essential in many parts of Asia and Latin America, it is likely to be
ineffective and perhaps even counterproductive unless there are corresponding changes in
rural institutions that control production.
• (e.g., banks, moneylenders, seed and fertilizer distributors), supporting government aid
services (e.g., technical and educational extension services, public credit agencies, storage
and marketing facilities, rural transport and feeder roads), and government pricing policies
with regard to both inputs (e.g., removing factor price distortions) and outputs (paying
market-value prices to farmers). 59
• Integrated Development Objectives Proposition 3: Rural development, though dependent
primarily on small farmer agricultural progress, implies much more. It encompasses:
• 1. Efforts to raise both farm and non-farm rural real incomes through job creation, rural
industrialization, and the increased provision of education, health and nutrition, housing,
and a variety of related social and welfare services.
• 2. A decreasing inequality in the distribution of rural incomes and a lessening of urban-
rural imbalances in incomes and economic opportunities; and
• 3. Successful attention to the need for environmental sustainability limiting the extension of
farmland into remaining forests and other fragile areas, promoting conservation, and
preventing the harmful misuse of agrochemicals and other inputs;
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• 4. The capacity of the rural sector to sustain and accelerate the pace of these improvements
over time. This proposition is self-explanatory. We need only add that the achievement of
its four objectives is vital to national development.
• This is not only because the majority of third world populations are located in rural areas
but also because the burgeoning problems of urban unemployment and population
congestion must find their ultimate solution in the improvement of the rural environment.
• By restoring a proper balance between urban and rural economic opportunities and by
creating the conditions for broad popular participation in national development efforts and
rewards, developing nations will have taken a giant step toward the realization of the true
meaning of development.

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