MEKELLE UNIVERSITY

COLLEGE OF BUSINESS & ECONOMICS

DEPARTMENT OF
ECONOMICS

Course Name: Rural

Development Course code: Econ
3112
Credit hours/ECTs: 3 /5 Semester
II Target group: 3rd year

Compiled by: Kidest G.

April, 2020
Mekelle
 Chapter One
Introduction
1. Concept of Rural Development
• Rural development is the expression which composed
of two basic terms rural and development.
• Rural: refers to areas where there are a relatively
 low population density
 agriculture and related primary activities
usually dominate the landscape and
economy
 Socio-economic infrastructures like health, education,
transportation, etc are poor
2
Contd..
• Development: refers to the process of overall
improvement in the quality of life (i.e. economic,
social, political, technological, environmental and
cultural dimensions) of a given economy.
• It is a multidimensional process which involving;
 changes in structures, attitudes and institutions
 the acceleration of economic growth
 improvement in socio-economic facilities like health,
education, transportation and communications,
etc
 the reduction of inequality, and eradication of absolute
poverty and unemployment within an economy.
3
Contd..
• Thus, Rural development refers to the process of improving the
quality of life and economic well-being of people living in relatively
isolated and sparsely populated areas.
• When we come to the definition of rural development, it is the
overall development of rural areas with a view to improve the
quality of life of rural people.
• Rural development, which is the part of a given countries
development, is a comprehensive and multidimensional concept.
• It encompasses the development of:
 agriculture and allied activities
 village and cottage industries and crafts
 socio-economic infrastructural facilities
 human resources, and sustainable resource use, etc
4
Why we concern about rural development?
• First, the larger part of the society of the
developing countries, and even about 46.1% of the world
population is a rural society.
• Second, in many developing countries, the contribution
of rural economy (agriculture and allied activities) to GDP
and employment of the labor force is very large.
• For instance, in Ethiopia, more than 70% of the
population is employed in the rural economy and the
rural economy contributes around 40 % to GDP.
• In addition, rural areas are the source of;
– malnutrition (food) for both rural and urban society
– medicines for medical services
– natural resources which regulate the ecosystem services, etc

5
Contd..
• Third, the majority of extremely poor population lives
in rural areas.
– out of the world’s 1.2 billion extremely poor people, 75%
live in rural areas (Anriquez and Stamoulis, 2007).
• Thus, improving the quality of life in rural areas
implies improving the quality of life of the majority of
poor.
• Fourth, there was urban bias development which causes
the rural urban migration problem and hence the
problems of over population, sanitation,
unemployment, etc.
• Therefore, rural development is crucial to enhance a
given county’s economy as well as to improve the
sustainability of environmental services.
6
1.2 Socio-economic Factors in Rural Development
1. Population and Development
• The relationship between population and
economic development is highly debatable issue.
• There are three views towards the effects of
population growth on economic development.
1. Pessimistic view
• Population growth restricts economic
growth.
According to the pessimists, population growth;
 can hinder human capital development
 hamper employment creation
 has pressure on the environment
 result in poor public services, etc
7
2. Optimistic view
• Optimists argue that, population growth
promotes economic growth.
• According to optimists, the higher population size
leads to further economic progress by ensuring the supply
of;
– labor force
– potential innovators to create new ideas and innovations, and
– also by enlarging the market for produces
• For optimists, population is not the problem but
the following are.
– Underdevelopment
– Resource depletion and environmental degradation
– Population distribution
– Subordination of women
8
Contd..
• Optimists also believe that, large population creates
scale of economies and hence helps to attract both
domestic and foreign investment in many economic
activities.
• As a result, there will be high employment
opportunities, technical progress, and growth in output.
• There are also indirect economic benefits of large
population size. These include:
1. large population size implies large number of strong
military power which maintain of national security
2. large population also has its own influence on
international diplomacy

9
3. Neutralist view
• Neutralist do not suggest extremely about the effects
of population size on economic development.
• For neutralists, there is no unique statistical
relationship between population economic
and growth.

10
 Malthus population theory
• Malthus argue that, population tends to grow at a
geometric rate, doubling every 30 to 40 years.
• Food supplies only expand at an arithmetic rate due to
diminishing returns to land (fixed factor).
• Malthusian population trap: due to unbalance between
population and food supply, countries would be trapped in
low per-capita incomes (per capita food), and population
would stabilize at a subsistence level.
• So, in order to stabilize population at subsistence level,
the following checks must be undertake.
1. Preventive checks: these checks lead to a reduction in
the birth rate through birth control.
2. Positive checks: these checks lead to an increase in the
death rate through war, plague, famine, etc.
11
Contd..
• To sum up, population growth has its own implications
for the rate of economic development.
• On one hand, if the population growth is faster than
the economic growth rate, per capita income will be
depressed.
• On the other hand, the higher population growth will
result in the higher productive labor force which helps boost
in the economy.
• The net effect is depend on whether the boost in economy
is outweighed by the decrease in per capita income or not.
• The common consensus made by economists is that,
to achieve sustainable economic development,
economic growth must outweigh population growth (that
is, there must be at least a room for improvement in
per capita income).
12
1.2.2 Gender and Development
• Traditionally, sex and gender are used
interchangeably. However, they are different
concepts.
• Sex: refers to the biological differences between
men and women.
• It can’t be influenced by race, religion, class,
ethnicity, and culture, age, marital status, time,
economic status, etc.
• Gender: refers to the socially constructed
differences between men and women.
13
Contd..
• Gender differences vary depending on race,
religion, class, ethnicity, and culture, age, marital
status, time, economic status, etc.
• Gender equality is a situation that permits women
and men equal enjoyment of:
 human and democratic rights
 socio-economic and political access
 ownership over resources
 benefits from development results, and so on.

14
 Why we bother about gender involvement
or equality?
• Almost half of the total world’s population is women.
So, any developmental strategies, policies and goals
cannot be realized without equal participation of both
women and men.
• In reality however, there is gender bias in education,
employment opportunity, access to assets, and decision
making in social, political and economical matters.
• These bias are common and have significant adverse
impacts in the realization of economic development.
• In order to realize development therefore, the potential
human resource has to be mobilized by treating both
men and women equally.

15
Contd..
• Rural as well as the overall development can be effective
if and only if there is women empowerment in the
following dimensions.
1. Social empowerment: giving equal social status and
creating equal participation in Education, Health, etc.
2. Economic empowerment: creation of equal
opportunities in economic decision making,
access to and ownership over economic resources,
employment opportunities, etc.
3. Political empowerment: women should represent in key
decision-making positions like in the public sector
and civil society at regional, national and international
levels. 16
1.3 Elements of Rural Development
• Rural development constitutes and can be measured in
so many different ways. But,
• More broadly, there are three basic dimensions that to
be considered to constitute the ‘true’ meaning of
rural development.
 basic need dimension
 economic welfare dimension
 capability dimension

17
1.3.1 Basic need dimension
• In rural areas of developing economies , peoples’
main problem is not lack of income to buy more
goods and services, but lack of basic needs of life.
• Due to this reason, objective of development can’t
be maximization of welfare, but minimization of
maximum suffering that can be faced by any one.
• According to this school of thought, development
in developing economies, in general, and rural
developing economies, in particular, has to be measured by
majority’s access to basic needs of life.
• That is; the main focus of development has to be
on improvement of peoples’ access to basic goods and
services of life, political freedom and self respect.

18
Contd..
• Based on this school of thought, elements of rural development are:
→Having access to basic needs of life
→Having freedom
→Having self respect
• Basic needs of life include access to minimum nutritional
requirement, basic education, basic health care, basic shelter and
basic clothing.
• Freedom is related to economic, social, cultural and political side of
life. Freedom implies emancipation from alienating material
conditions, servitude to man, nature, ignorance, misery, institution
and dogmatic beliefs. So it means expansion of peoples’ choice to
develop and use their potential as they choose by avoiding
economic, social and political constrains in the way.
• To have self respect, a person must have decent life in relation to the
community standard and must be respected by the community.

19
 Theoretical and practical shortcomings of basic
necessity dimension
1. The actual definition and measurement of basic needs in practice is
vague.
– Without considering the social, cultural, political and economic
structure of a given location, it is difficult to define what is
basic and what is not basic. That is; the actual definition
and measurement of basic needs, in practice, is still vague.
– Example: Car which is luxury good in Ethiopia may be a basic need in USA.
2. The link between the supply of basic needs and the generation
of sustainable economic growth is not clearly understood.
– Currently, it is understood that government supply of basic needs for
the mass is not a guaranteed recipe for success in the long run.
– In general, the school’s recommendation is that, the state has to fill the
gap in people’s access to basic needs of life through welfare programs.
– However, even though this action is beneficial to receiving families in
the short run, in the long run it creates dependency problem
poor and
among thewill bankrupt the state. 20
1.3.2 Economic welfare dimension
• According to this school of thought, if an economy has functional
market to supply private goods and services, and functional and
democratic state to supply public goods and services; more income
means more goods and services to be consumed to generate utility.
• That is, having functional market and state, a person with more
income or expenditure will have more capability to consume more
goods and services.
• Moreover, assuming people are rational enough to be the best judges
of their own welfare; people will only use their income in goods and
services that can maximize their utility, in best possible way.
• In addition, under democratic systems by using their voting power,
people will determine the optimal taxes and public expenditures
needed in order to have optimal supply of public goods and services.
21
Contd..
• Under such conditions, more income or expenditure will mean more
goods and service.
• As a result, the economic welfare school tries to measure development by
income or expenditure.
• Fundamentally, the school tries to measure development by utility; with the
assumption that: more utility means more development.
• However, utility generated from given income, is neither observable nor
comparable between different persons.
• Utility is unobservable psychic satisfaction, which is not possible to
measure.
• As proxy, they use income or expenditure as measure of development,
assuming people with more income will have more goods and
services to generate more utility. But this can be realized:
1. If there are functional market & state or other institutions to create exchange
entitlement
2. If people are rational enough to be the best judges of their own 22
Contd..
• But, if the market and state are not functional and if
there are no alternative institutions that can fill the gap,
having more income means having more paper,
nothing more than that.
• In general, families and locations with higher income or
with higher expenditure are assumed to be more
developed (having better life) than other families and
locations in this school of thought.
• The dimensions or elements of rural development in
this school of thought are:
→Income per capital & its distribution
→Expenditure per capital & its distribution

23
Contd..
• This measurement of rural development has its
own theoretical and practical shortcomings.
1. As utility is psychic in its nature, it is impossible
to use utility as a direct measure of
development since comparison among
individuals or groups is difficult.
2. In practice, it is difficult to find the well
functioning market without any intervention.
3. The utility of an individual or group is not
depends only on the income level but also on
other non income gains like autonomy and
freedom.
24
1.3.3 Capability dimension
• The capability dimension focus the ability of
individuals
on or groups to functioning well.
• Under this dimension, development is measured in terms
of the ability of individuals or groups in having the
quality of life that they prefer.
• In capability dimension, elements of rural development
includes access to:
health care, educational, and other infrastructural
facilities
market
employment opportunity
all necessary information
political freedom
having decent life by community standard and so on
25
Contd..
 However this dimension of
rural development is interesting
in its theoretical aspect, it
requires the distribution of income
from rich to poor which may
cause social disorder.

26
 Stakeholders in Rural Development
1. Rural development as part of the developmental
process of a given country is mainly the mandate
of government.
– The primary tasks of any governments is to improve the
livelihood of its society particularly the poor.
– Government is responsible in designing, implementing and
monitoring the developmental policies and strategies
based on a strong philosophy of people first and foremost.
– It is also the task of the government to design and enforce
rules and regulations that encourages the society to
work.
– Governments also need to provide basic socio-economic
services and facilities such as health care and
education, infrastructures and investments where the
market is absent.
27
Contd..
2. Rural Development has wide coverage or scope
– Ruraldevelopment requires the change in
economic, social, political, environmental, and cultural
practices.
– It involves:
 agrarian reform through the use of science and technology
 sustainable use of natural resources, control
 development
of climateof
change, and proper waste managementhealth
communication,
centers, schools, and other infrastructural facilities, etc.
transportation,
– Due to these facts, rural development requires the
mobilization of huge funds and resources. Thus, in
addition to governmental activities, rural development
process needs the involvement of:
 private sectors, NGOs, local community, research centers,
extension workers, etc

28
1.4 The Role of Agricultural Research
and Extension in Rural Development
• Agricultural Research and Extension concerned with
the generation and diffusion of new
technology designed to increase the productivity of
resources in farm production.
• Generation refers to the undertaking of research, and
diffusion to the provision of extension services
or spreading of information among farmers.
• In order to transform the subsistence state of
agricultural products to market oriented
production system, agricultural research and
extension services are crucial.
29
1.4.1. Agricultural Research
• As agricultural products are essential for the life to
persist, agricultural research is crucial for the
development of the sector.
• Agricultural research helps to:
 generate new or improved production techniques and
technologies
 Improving agricultural productivity in terms of quantity
and quality (e.g., selection of drought-resistant
crops and animals, development of new pesticides,
simulation models of crop growth, etc)
 increase and generate agricultural income foreign
and exchange
 moderate food prices by increasing production
 reduce pressures on the natural resources
30
Contd..
• Agricultural research can be categorized into
basic research, applied research, adaptive
research, and testing research.
• Basic research: develops knowledge with
little or no specific practical use.
– In includes; studies of evolution, genetics,
biochemical process, etc.,
– It is the base to discover fundamental principles
of substantial significance to more
applied researchers.

31
Contd..
• Applied agricultural research: is aimed at
solving particular biological, chemical, physical,
or social science problems affecting one or more
countries or areas in a state or region.
– Development of new plant varieties, methods for
controlling specific insects and disease in plants or
animals, and animal nutrition research are examples of
applied research.
• Adaptive research: takes the results of applied
research and modifies or adapts them to local
conditions within a country or region.

32
Contd..
• Testing research: is conducted on local
experiment stations or on farms to assess
whether research results from other locations
are suitable for solving local problems or not.
– Improved pesticides, management practices, or
plant varieties are examples of research
results that may be tested.
– All countries conduct some testing research, but
for very small countries with limited
resources, testing may represent a large
portion of total research. Much testing is
conducted by farmers themselves.
33
Contd..
• In recent years, a number of countries especially
developing countries focus on agricultural
researches in order to shift the agricultural
production system and hence the rural world.
• In Ethiopia for example, public sector research is
a long-standing cornerstone in agricultural sector.
• It goes back to the late 1940s and currently, public
expenditure on agricultural research and staffing
has shown significant improvement. There are
about 62 agricultural research centers in the
country.

34
Contd..
• The Ethiopian Agricultural Research Policy
Objectives focus on generating, improving and
adopting highly productive:
 farming technologies and practices
 variety of crops
 developing close collaboration with farmers regarding
planning, implementation and use of
agricultural research results.
 providing advices for the government on agricultural
research policy formulation

35
Contd..
• As a result, there is a significant improvement in the
agricultural production of the country especially since
2003.
• Despite the modest achievements of agricultural
research on development in Ethiopia in the past few
years, there are some serious challenges facing
Ethiopia’s agricultural research system.
 the introduction, diffusion and use of newly generated
technologies and highly productive seeds to
farmers are slow due to limited financial and
infrastructural facilities.
 the coverage of wider range of varieties of crops and areas
in the country is low due to limited financial and skilled
man power.
 there is also fluctuation in rainfall as the countries
agriculture is mainly depends on the seasonal rainfall.
36
1.4.2 Agricultural Extension
• Extension service is one of the institutional support
services that provided to the farmers in order to:
 educate and train farmers in order to increase their
awareness on improved farming technologies
 adopt new innovations to increase farm yields and hence
income which helps to improve the living standard of
farmers
 use its resources efficiently
 conserve environmental resources

37
Contd..
• Agricultural extension service also facilitate:
 the interaction between research centers and farmers, and
among farmers themselves
 the supply of credits and inputs
 markets for the products and develops business
management skills for the farmers
• In general, agricultural extension bridges the gap
between available technology and farmers'
practices through the provision of technical
advice, information and training.

38
Contd..
• Since 2003, the Government of Ethiopia has been
promoting extension services to increase the production
and productivity in view of achieving food security.
• It has established more than15,000 Farmer Training
Centers (FTCs) and gave training for more than 45,000
development agents (extension workers).
• They are expected to:
 introduce modern farming techniques and use of inputs
 form strong linkages between farmers and research centers
in order to share experiences
 give all necessary advices to the farmers in order to
increase their productivity.

39
Contd..
• Despite to the commitments taken by the government,
there are many challenges in providing successful
extension services. These include:
 provision of adequate material, infrastructural and financial
support is limited
 the technical capacity of extension workers and their
commitment in delivering new technologies and
practices is not successful.
 there are also weak linkages among farmers and research
centers, between farmers and market, among extension
workers and farmers, and experience sharing among
farmers are still low.

40
 CHAPTER TWO

Institutions for Rural Development

41
 Think about the following questions.

1. Why are some countries rich and others poor?

 Is it because the riches are more intelligent?
 Because they work harder?
 Because they are morally more just?
2. Why are the citizens of some countries more free to
realize their potential than others?
3. Why are some organizations more efficient
and effective at what they do than others?

42
2.1 Definition and Concepts of Institution
• Different authors define institution in different ways of
expressions which are quite similar in spirit. For
example,
• North (1991) defined institution as “humanly devised
constraints that structure political, economic and social
interaction among a given society.”
• According to him, institutions consist of both informal
and formal constraints. Where,
– informal constraints include sanctions, customs, and codes
of conduct, and
– formal constraints are constitutions, laws, property rights.

43
Contd..
• Ostrom (2005) defined institutions as
“prescriptions that humans use to organize all
forms of repetitive and structured interactions
including those within;
– families, neighborhoods, markets, firms, governments,
etc at all scales”.
• Institution is therefore defined as, a system of
enforceable rights and obligations in the form of
recognized,
– formal as sanctioned by law, or
– informal as sanctioned by social norms.

44
Contd..
• Institutions can be sanctioned by;
– community,
– state or/and other economic agents to coordinate the effort
of each and every agent towards specific goal.
• The definition of institutions and organizations are
traditionally overlapping and peoples use them
interchangeably. But they are quite different.
• For instance, North (1990) defined institutions pithily
as the ‘rules of the game’.
– He uses a football analogy, where the rules of football
game are institutions and the team of players
is an organization.

45
Contd..
• Thus, organization is a functional body that
organized within the rules set by institutions to
achieve particular goals.
– Organization can be family, particular community,
firm, group of individuals, ministry, and so on.
– Where as, institutions are marriage, the constitution,
property rights, the market, state, and etc that guide
organizations.
• Institutions and organizations are important
because they generate incentives that govern
human behavior.

46
Contd..
• Incentives are;
– rewards and punishments that accrue to individuals (or
groups of individuals) due to certain actions or
behaviors.
• Different organization can create different institutions,
and different institutions create different incentives,
which directly affect how well they achieve their
organizational goals.
• Thus, the proper design, implementation, and periodical
modification of development institutions are essential
to achieve organizational goals as they are important to;
– increase human freedom and the accomplishment of
obligations which facilitates developmental process.
47
2.2 Demand and supply of institutions
• Institutions are demanded to move organizations
towards higher levels of efficiency and effectiveness.
• They directly affected by change in the knowledge,
development level, technology, factor endowment,
cultures, and the intended goals of an organization.
• As the economic environment changes, there must be a
need for institutional arrangement, periodical
formulations and revisions of institutions to assure the
sustainability of development process.
NB
– although formal rules may change overnight as a result of
political or judicial decisions, informal constraints
embodied in customs, traditions, and codes of conduct are
much more resistant to deliberate policies.
48
Contd..
• The demand for institutions is depends on how they
are effective in achieving the desired goals.
• There are five criteria to differentiate better and
effective from worse institutions.
1. Efficiency and growth: better institutions are more
complex, larger scale, cost minimizing, and tend to
increase growth.
2. Autonomy and freedom: better institutions allow
‘freedom to choose’ based on competition and
free discussion.
3. Diversity and pluralism: better institutional systems
use different kinds of agency to provide political,
economic, or social services to meet the needs of the
whole people.
49
Contd..
4. Equity and justice: better institutions create equality
of opportunity, performance based rewards,
and elimination of exclusion and insecurity.
5. Connectedness and voluntary cooperation: better
institutions increase voluntary interdependence,
and capacity to cooperate freely with each other.
• The supply of institutions depends critically on:
• the balance of power among interest groups in a society
• culture of a given community which includes
customs,
believes, religion, and ideology.
• advances in knowledge and technologies
also lead to institutional innovations for their 50
2.3 Market as institution and rural development

• Under the market-oriented economy, everybody assumed to

act rationally to maximize their own welfare. That is,
• In product market,
 producers produce to maximize profit
 individuals intended to maximize utility
• In the labor (factor) market,
 firms try to hire resources at least cost
 workers are trying to have better paying job with better working
environment
• In the foreign market,
 countries are trying to have more foreign income
and more inflow of foreign investment, and so on.
• Thus, free market is an important institution for
all economic agents so as to maximize their rational
objectives.
51
Contd..
• The final outcome of such rational action will depend
on the availability of property right.
• Property right is the only institution that promote
efficiency in the market.
– Enforceable property right provides all market agents a
right to negotiate and make a decisions based on their
consents to interact with their environment.
• Farmers as a producers and consumers need a free
market mechanism. As a producers, free market:
 create efficient and just price for their agricultural output
• And, as consumers, free market:
 will provide them agricultural inputs at just price
 Will provide them with free financial markets which
facilitate their access to credit
52
Contd..
• However, agricultural marketing services in
developing nations many are costly and
productive due to: exhibit less
 traditional way of production hence low quality of outputs
 lack of high storage space
 high transportation cost (due to poor road infrastructure)
 few processing activities and/or high cost of processing
 traditional marketing system
• Thus, transformation of traditional agricultural
marketing is required to accelerate the rate of growth of
the rural economy through increasing the intensity of
product which raises innovation and productivity
through competition.
53
2.4 Market outcome under its restricted assumptions

• The fundamental assumptions of free market include:

1. There are large number of buyers and sellers: both
product prices are determined only by the force of
the market. Thus, each buyer and seller are price
takers.
2. There is given and fixed technology: technology
assumed to fixed and given.
3. There is perfect mobility of factors of production:
all factors of production assumed to move from firm
to firm and/or from place to place without any
restrictions.

54
Contd..
4. There is perfect information/knowledge:
all economic agents have equal and perfect
knowledge about market price, quality of output,
market demand and supply level, and so on.
5. Entry and exit is free for all: all economic agents
are free to join or leave the market.
6. There are no public goods and externalities: there
is a property right. Thus, any benefits and costs are
taken by those who are responsible either for the
consumption or production.
7. Economic agents are rational: economic agents
are assumed to maximize their respective
objectives rationally.
55
Contd..
• Under these market-oriented
economy
assumptions,is always efficient in allocation
resources. of
• That is, there will be Pareto optimal allocation of
resources which is the cornerstone of any
development effort.
• At the Pareto optimal point it is impossible to
make someone better-off without making
somebody else worse-off.
• That is, there is no home for the improvement of
the allocation of resources.

56
Contd..
• At the Pareto optimal point, there are:
1. Pareto efficiency in consumption: consumers achieved
their best utility from the limited resource that
society posses. Thus, it is impossible to increase
utility of any customer by changing the
composition.
2. Pareto efficiency in production: it is impossible to
increase the level of production by changing input
composition and efficiency of input use.
3. Pareto optimality in distribution: the limited resources
that the society posses are distributed among firms, and
goods and services that can be produced from those
limited resources are distributed optimally among
consumers. So, there is no further distribution.
57
Contd..
• Thus, market is an important institution to coordinate
the rural development effort in specific, and the overall
economy development effort, in general.
• The efficiency of free market in rural development
mainly depend on fundamental institutions which
include:
 property rights under the protection of law
 Property exchange based on the consent of involved parties
 freely agreed contract which enforced by state or other
third party to reduce uncertainty and risk

58
Contd..
• Although free (perfect) market is efficient in allocation
of resources for economic agents under its restricted
assumptions, the perfection of market is unrealistic in
our real world.
• Thus, even though market is an efficient institution in
providing poor rural society with agricultural inputs,
credits, and just price for their outputs, it fails:
 in providing all socio-economic infrastructural
facilities (especially in providing public goods and
services)
 due to the existence of externalities and
information asymmetry

59
2.5 Institutions to deal with market failure
1. The need for government intervention in agriculture
and rural development
• Due to market failures, inefficient marketing services,
and missing markets, market allocation will not result on
the best possible resource allocation.
• Market forces alone is therefore, will not result in
best possible rural development.
• Thus, we need alternative institutions to
give complementary signal and to coordinate diverse
activity of many agents toward achievement of fast and
sustainable development.
• The role of state in rural development as complementary
to market and its rationales are given below:

60
Contd..
1. To provide public goods and services:
• If the supply of public goods and services are left for
the will of the people, there is an incentive to be a free
rider than paying for supply of public goods and services.
• As a result, the supply of public goods and services will
be sup-optimal.
• Thus, in order to supply optimal public goods and
services like roads, schools, defense, public
administration, and so on people expected to pay a
mandatory taxation.
• Using the tax revenue, state is needed and expected
to supply the efficient (optimal) public goods and
services which are essential for development.

61
2. To internalize externality:
• If market demand is the same as social marginal benefit
and if market supply is the same as social marginal cost,
market forces will result in the best possible resource
allocation.
• However, when there is negative externality, social
marginal cost will be higher than private marginal cost.
• As a result, market institutions will over supply good
or service.
• To make the private marginal cost equal to social
marginal cost, mandatory tax has to be laid .
• When mandatory taxes are laid in production, market
forces will result in efficient and optimal production of
good or service.

62
Contd..
• For example, factories produce goods and services
to maximize their private profit by ignoring the
negative externality exerted on society in terms of river
pollution, air pollution, etc.
• By laying taxes, cost of production will rise and
hence, firms forced to reduce the production of the good or
service that generate externality.
• The tax revenue can be used to compensate the
adversely affected parties and/or to invest on the
purification of pollution.
• When there is positive externality, social marginal benefit
is higher than private marginal benefit.
• For example, education, health care, sanitation and
other social goods and services have positive
externality on society’s welfare.
63
Contd..
• So, market mechanism result in sub-optimal supply
of social goods and services.
• Therefore, state has to subsidize the supply of
education, health care, sanitation and other social goods
in order to enable people to be more educated, healthy,
clean, etc.
3. To deal with imperfect information and risk:
• Given rural areas are highly dependent on farming
and farming in turn is dependent on random natural
events, there is high level of risk in rural areas.
– Information, insurance, financial intermediation and future
markets are either missing or highly imperfect.
• Thus, there is a need for state intervention in the form
of price stabilization, safety net, drought relief and other
forms which have significant impact on rural development.
64
4. To create egalitarian society:
• Even if markets are Pareto optimal (efficient), the
final distribution of benefits may not be egalitarian (equal)
if the initial distribution of capabilities (education, wealth,
asset, social network and so on) is unfair.
• Such distribution of quality of life may not be acceptable
to society, given the fact that the social value of the
poor persons’ benefit can over weight the social loss of the
rich.
• Thus, it requires the distribution of resources
and capabilities from rich to poor through tax or subsidies.
• Since market is not perfect in developing countries
in general and rural areas of developing countries in
particular, government intervention to distribute factors of
production and capabilities is crucial to achieve rural
development. 65
5. The need to create rural-urban balance:
• Missing markets, missing public goods(services)
and missing administrative services are common
reality of rural areas of developing economies.
These facts coupled with low organizational
capital of rural population, can make development
highly urban biased phenomena.
• To solve this challenge, state intervention to
organize rural population into functional political
body, economic organization, and to improve the
provision of goods and services is critically
needed in rural areas.

66
6. Need for leapfrogging or to compress the gestation period
of development:
• If market forces are left for themselves, they will self-
correct and efficiency can be achieved over a very long
run; and it can be lead to economic development.
• But, the implication is that we have to wait 200 to 300
years in order to reach the level of development attained
by developed economies.
• Due to this fact, there is a need for complementary local
institutions that deal with market failure.
• That is, with appropriate and selective intervention of the
state, government possibly shorten the gestation period of
development in maximum of 50 years (as Japan) or in
minimum of 20 to 30 years (as China).

67
Contd..
• In developing countries like Ethiopia, where majority
of the population is living in rural areas,
any leapfrogging effort that ignore rural areas is a
faulty business.
• The leapfrogging will call for optimal government
intervention in rural areas, where series
market failures and missing markets are widely
observed.

68
2.6 Market Failure
• As we have seen in the previous topics, the neoclassical
school of thought argue that, free market will result in
efficiency in consumption, production, and distribution
under its some restricted assumptions.
• In practice however, there is a market failure in
providing the Pareto-efficient level of production and
consumption.
• A market failure is a situation where free markets fail
to allocate resources efficiently from society’s point
of view.
• Economists identify the following points which
possibly causes the market failure (Productive and
allocative inefficiency).

69
2.6.1 Traditional Market Failures
1. Existence of externality
• Under perfect (free) market, market expected to provide
the socially desired level of output and price through the
forces of demand and supply.
• Under this condition, transactions are assumed to
be undertaken based on the consent of the involved parties
and the benefits and costs of transaction would be
assumed to affect only the parties that involved in the
transaction.
• But in reality, the action of those parties can affect the
third party that was not in the transaction.
• That is, consumers and producers who attempt to
pursue their own self interest may fail to take into
account the effects of their actions on third-parties, such
effects are called externalities.
70
Contd..
• An externality is an effect on a third party that is caused
by the consumption or production of a good or service by
the parties in the transaction.
• With the existence of externalities, the market will not
produce the supply of the good that is socially optimal – it
will be over or under produced. That is, equilibrium
quantity and prices will be altered.
• Example,
1. A firm who produce chemical products to maximize its own
profit might damp residuals to the river which harm the health
and livestock of the local society that reside around the river.
2. The horticultural farm can benefit beekeeping farmers.

71
 p

market supply = PMC

p*

market demand = PMB

q*

q
Fig.1 Market allocation through demand and supply forces 72
 The case of negative externality
• A negative externality is a negative spillover effect on
third parties. In free market, such effects are not taken
into account by the producers or the consumers.
• For example, producers recognize only costs of
production that they directly incur (only prices of
factors of production). Hence, they set their products’
prices based on only those costs.
• With negative externality however, there could be costs
to the society which are not considered by the firms
(health and environmental damage due to water and/or air
pollution for example).
• Consequently, since the costs of those externalities are
not accounted in the price of the good, the price is lower
than it should be, and too much of the good is
produced and consumed.

73
Contd..
• Figure 2 illustrates that, based on the market demand (benefit)
and supply (cost) curves, the market offer the optimal level
of output and price.
• qm and Pm are therefore, the market clearing quantity and
price which maximizes both producer and consumer
surpluses respectively.
• If there are negative externalities exerted on other economic
agents and/or the environment, social cost would be higher
and it will not be equal to the private marginal cost
of each additional output.
• As a result, qm cannot be a Pareto optimal point since the
social marginal cost is higher than the marginal benefit
(i.e. since there is a deviation between cost and benefit).
74
 p
SMC = PMC + external cost

Private supply curve = PMC

P*
tax
pm

M
a
q* qm r q
k
Figure -2: Negative externality e
t

d
e
m 75
Contd..
• Fig.2 clearly shows that, when there are
negative externalities, market allocation will not result
in Pareto optimal resource allocation.
• The society want less supply of the good which
generate negative externality. Thus, by introducing taxes
equal to P* - Pm, socially desirable level of resource
allocation can be attained.
• Taxes raise the cost of producers and it forces the
private marginal cost curve to shift upward and equal to
the social marginal cost curve.
• The intersection between social marginal cost and
marginal benefit will therefore, gives us a socially
desirable level of quantity (q*) and price (P*).
• Any production beyond q* will cost more than the
benefit it can generate to society.
76
 The case of positive externality
• Positive externalities are consequences that benefit society.
Under market mechanism, such benefits are not accounted
in the price of the good.
• As a result, the price is higher than it should be, and too little
of the good is consumed and produced.
• Merit goods and services like education, health care, etc will
not only benefit the individual person, but also the society.
• Educated person for example, can have better production and
management skill and will earn high payment for
his/her services on one hand.
• On the other hand, educated person will benefit the society by
introducing and providing better production techniques
and managerial services.

77
 P
market supply = PMC

P*
subsidy
pm

SMB = PMB + external benefit)

market demand = PMB

qm q* q

Fig.3 positive externality

78
Contd..
• qm and Pm in the above figure are the optimal level
of output and price based on market allocation. However,
qm is not the optimal level of output with positive
externality.
• This is because, at qm social marginal benefit is
much higher than the social marginal cost of production.
This permits increment in social welfare by producing
and consuming more output.
• Socially optimal level of output (q*) can be supplied
at efficient price P*, if a subsidy equal to P* - Pm is given
to the providers of education services and to their customers.
• Summing up, the state or other third party must use tax
in case of negative externality and subsidy in case of
positive externality in order to improve market inefficiency
with the existence of externalities.

79
2. Monopoly Power
– Markets may fail to control the abuses of monopoly
power.
– In real world, markets are imperfect. There are
restrictions to firms to enter the market, there are also
restrictions on the mobility of factors of production.
– These situations limit the degree of competition and
leads to the suboptimal supply of output at higher
price.
3. Property Rights
– Markets work most effectively when consumers and
producers are granted the right to own property, but in
many cases property rights cannot easily be allocated
to certain resources. Failure to assign property rights
may limit the ability of markets to form.
80
2.6.2 Market failures related to imperfect
information and missing markets
1. Information Failure
– Markets may not provide enough information during a
market transaction, it may not be in the interests of one
party to provide full information to the other party.
– In real world there are manipulative middle man who
are working between producer and consumer to
signaling information.
– market is the most effective institution in
allocation of resources iff there is perfect mobility
of factors of production. But, since information is
imperfect, factors cannot be freely move certainly
from one firm to the other or from one sector to the
other.
81
2. Unstable Markets
– Sometimes markets become highly unstable, and a
stable equilibrium may not be established.
– Example, agricultural product markets, foreign
exchange, and credit markets are not stable. Such
volatility may require intervention.
3. Inequality
– Markets may also fail to limit the size of the gap
between income earners, the so-called income gap.
– Market transactions reward consumers and producers
with incomes and profits, but these rewards may be
concentrated in the hands of a few.

82
4. Missing Markets
– Markets may fail to provide all goods and services to meet
a need or want of the society. Public goods and
services such as, defense, street lighting,
highways, and so on cannot be provided by the
market mechanism.
– By their nature, such goods and services are non-
excludable and non-rival. People normally reject to pay
for the provision of public goods like for road
construction, but if road is built on the expense of
others, they will use it without any exclusion. That
is; people want to be a free rider.
– The provision and administration of such goods also
requires high cost especially in rural areas since it needs
the coverage of wider areas. Private sectors will
therefore not provide them since they cannot profitable
from them. 83
– For such goods and services private (market)
allocation will result in sub-optimal resource
allocation and the state has to supply them by
imposing mandatory taxes in order to meet the need
of the society.
5. Incomplete Markets
– Markets may fail to produce enough merit goods,
such as education and healthcare.
6. De-merit Goods
– Markets may also fail to control the manufacture
and sale of goods like cigarettes and
alcohol, which have less merit than consumers
perceive.
84
[Link] Role of State in Rural and Agricultural Development

• According to Robert Chambers (1989), the state

has three universal functions which
are fundamental for the rural poor. These are:
– Maintaining peace and democratic rule of law
– Provide basic infrastructure and services
– Manage the economy

86
 Maintain peace and democratic rule of law
• Peace and rule of law are the base for any development.
In many developing counties, civil disturbance and war
were the critical problems which resulted in
underdevelopment due to:
• fear, pain and torture
• the destruction
• theft or loss of property
• the insecurity of tenure
• the disincentive to invest
• less production and productivity when adults
are fighting, guarding or killed
• the interruptions to education
• the disruption of services due to corruption, etc

87
• However, sustainable development requires the prevalence
of peace and security as well as the rule of law in order
to encourage peoples to work and invest.
• Therefore, the state has to maintain peace to change
the above bad situations in order to achieve the
overall development and rural development so as to
improve the quality of life of the rural poor.
• Maintaining rule of law is also another fundamental role
of the state. There must be equal treatment of the citizens of
the country without any discrimination to achieve the
desirable development.
• The maintenance of peace and security, the
fairly administered rule of democratic law, and
accessible and equitable justice (which are the role of the
state) matters to improve the quality of life of the rural poor.
87
 Providing basic infrastructure and services
• With the absence of market, it is the role of the state
to provide the rural society with basic infrastructures
and services.
• The provision of social and economic infrastructures such
as, roads, schools, health care, agricultural and
veterinary extensions, water supplies, telephones and
electricity supplies, basic information, etc are the
fundamental role of the state.
• Although, NGOs and other civil organizations
can complementarily deliver such infrastructures, the
state remains the logical long-term institution to provide
and maintain much of a country’s basic infrastructure
and services.

88
 Manage the economy
• Managing the economy, both internally and externally is
a legitimate and necessarily function of the state.
• Starting from the formulation of rural development
policies strategies, there are three points in which the
state should mange the economy in the rural areas.
1. To stabilize the price of agricultural products
• in order to help the farmers and urban poor.
2. To create efficient marketing organizations
• In order to support the exchange of agricultural
products by providing necessary market information
3. To fulfil basic necessity needs
• In order to eradicate the absolute poverty, the state has to provide
basic goods and services to fulfil the basic needs of the society.
89
 2.8 State failure to coordinate rural development
• State can solve some market failures, but it cannot
solve every market failure problem everywhere. The state
may fail due to:
1. Information asymmetry and managerial diseconomies
from the state side:
• state faces series information asymmetry related to
economic agents actual income and wealth, actual
provision and managerial costs related to public goods, and
the behavior of individuals in the use of public goods and
services.
• If the state lacks adequate information on economic agents’
income and wealth, expenditure, the demand for and
behavioral use of public goods, it is difficult to the sate:
• to provide public goods, and
91
• to internalize externalities.
2. Information asymmetry from public side
• The society might be less or miss informed
about the states policies and strategies
importance, implication and possible outcomes.
• This gives higher
situation
politicians to divert freedom for from
promises they made to their
the society
electoral
and helps
them stay in office.

91
3. The failure of voting to consider intensity of want
• In democratic system every person is given equal voting
right. For example, if there is newly introduced policy, all
citizens given equal chance to vote.
• However, some group of the society may support it and
others may reject it. In this case, the application of the
policy depends on the vote of majority.
• Such application of policies does not consider the intensity
of wants of the whole society. Thus, voting can’t
necessarily lead to maximum social welfare.
• Some states are also weak in maintaining peace and
securities of the society and also are politically and
economically corrupted and fail to meet the want of the
society.
92
4. Lack of incentive and high inefficiency in
public sector
• The bureaucratic system in public sectors are less
flexible and the incentive that given for public
servants are lower. These situations lead to:
• Corruption
• less productive, inefficient and ineffective public servants
• These undesirable practices and inefficiency in
public sectors hindering the development process
and slowing its pace.
93
 2.9. Institutional innovation to deal with market and
state failure in rural development
• With the prevalence of perfect market and well
functioning state, both institutions are the most
important for the development.
• In such case, what is to be needed for efficient attainment
of development is just the mix of market and state institutions.
• However, in our real world, we have imperfect market
and state. Due to this reason, we need complementary
institutions in order to improve the efficiency of the market
and state.
• Some of the complementary institutions include:
service cooperatives, Value chain and contract farming,
Microfinance institutions, Social Capital and community
development, Civic societies and NGOs etc.
94
 2.9.1 Service Cooperatives
• In order to improve the bargaining power of
small scale farmers and to minimize their
transaction cost and to close the information
gap, there is a need to organize them into
service cooperatives.
• This will enable them to have more market power that
can
balance the power of manipulative middle man.
• It also helps them to have access to credits at least cost
• It helps them also to use new farming
technologies, experience sharing, and efficient use 95

of their resources
 2.9.2 Value Chain and Contract Farming
• Contract farming refers to the formation of linkages
among farmers and other economic agents such as
exporters, a wholesalers and manufactures, research centers
and extension workers to insure the provision of
agricultural inputs and hence the supply of agricultural
outputs.
• Such activity can solve lack of credit, lack of
appropriate farming technology, lack of extension service,
and market uncertainty.
• Value chain on the other hand refers to adding value to
the agricultural products, and managing the process of
collection and the transaction of an output from farm land
to the final consumer.
• It helps to insure the supply of quality product that
demanded by the consumers. 96
 2.9.3. Microfinance Institutions (MFIs)
• Rural economy is mainly depend on the risky and
uncertain natural random which affects agricultural products.
• So, it is impossible for the formal and modern banks as
well as insurance companies to provide credits and to
insure the agricultural sectors.
• In addition, banks request collateral that farmers may
not have to lend their money.
• Local money lenders are also inefficient in providing
credit for small scale farmers since they can exploit
farmers by forcing them to pay high interest rate.
• Due to these facts its MFI which has the nature of formal
and informal money lenders can play a great role in
providing efficient financial support and credits for the
farmers. 97
 2.9.4 Social Capital and Community Development

• The use of socially developed cultures, norms, beliefs, and

established community networks help the process of
development at high rate.
• Socially developed practices and norms help:
– to shape the behaviour of individuals and groups towards the
desirable goals.
– to solve the problem of information asymmetry and work ethics
• Participation of community in the development process
help to formulate and implement the socially desirable
development policies.

98
 2.9.5 Civic Societies and NGOs
• Since state has inflexible system and less efficient
civil servants, it fails to provide public goods and services
in an optimal way and to correct all market failures.
• thus, it is important to allow Civic Societies and other
None Governmental Organizations (NGOs) to provide and
hence meet the need of the society.
• Civic societies and NGOs are basically established based
on individuals or groups consent to provide voluntary services
to the society especially for the poor rather than their
self interest.
• Due to this fact, their participation is important in
the provision of public goods where market and states
are inefficient in providing such goods.
99
• In general, development as general and rural
development specifically requires the integrated
participation of market, state, local community, civic
societies, and NGOs.
• But, even if NGOs and Civic Societies are important
to improve the life of rural society, they are basically
established based on the financial support from donors
especially from foreign donors.
• In addition, most NGOs have the tendency to
spend significant portion of their budget on wages and
salary of workers. As a result, they will not have enough
finance to achieve their stated development objectives or
goals.
• So, it is important for developing countries to examine
and evaluate the interests of those donors and the
practical outcome of NGOs before rushing to accept them. 100
 2.10 The Institution of Property Right

• Property is considered as an asset that benefits the

owner, and right is a set of actions and behaviors
that allows the owner of the property to use and to
prevent others from using its own property.
• That is, property rights over assets consist of the
rights, or the powers, to consume, obtain income
from, and alienate these assets.
• Under free market, producers and consumers can
make their transaction based on their consents iff
they possess property rights over their assets.
101
 Efficient property rights structures
• The structure of property rights that could produce
efficient resource allocations in a well-functioning market
economy has three main characteristics:
1. Exclusivity: All benefits and costs accrued as a result of
owning and using the resources should accrue only to the
owner.
2. Transferability: All property rights should be transferable
from one owner to another in a voluntary exchange.
3. Enforceability: Property rights should be secure from
involuntary seizure or encroachment by others.

102
Types of property rights based on the degree of control

PROPERTY RIGHT
RIGHT TO
RIGHT TO REGULATE
USE
•Management

•Access right
right
•Exclusion
•Withdrawa
right
l right
•Alienation
right

FIVE TYPES 104

• Based on the nature of the property and
right holders, there are four property right regimes.
1. Private property: Individuals have a
complete control over a specified resource.
– The right-holders enjoy both the right to use
and the right to regulate resources.
2. Common Property: Common Property is
the private property of a group of co-owners.
– The users abide by common rules in
relation to the specified resource.
– Individuals have only rights to use but have no right to
exclude others.
104
3. State Property: The state retains direct control
over the resources and will determine to what
extent individuals have the access and uses.
– For example, in many developing countries, land belongs
to the state and agriculturalists and other stakeholders
have only the right to use.
4. Open access: When resources are owned by no
one and are used by all without any
restriction, they are called open access resources.
– In such case there is no property right and it leads to
resource destruction and increases behavioral uncertainty.
– This is often termed as “tragedy of open access” or
formerly coined as “the tragedy of the commons”.
105
 Exercise
• Briefly explain the difference
between institution and organization.
• What is market failure? and discuss its causes.
• Briefly explain the concept of externality
and its types.
• Why is a need for
there government in
intervention agriculture and rural
development?
106
 CHAPTER THREE

Theories, Models and Approaches to

Rural Development

107
 3.1 Lewis’s Model of Economic
Development with Unlimited Supply
of Labor
• The well-known development economist Arthur Lewis
put forward his model of Economic Development with
Unlimited Supplies of Labor in 1954.
• According to him, a given economy has dual economic
structure.
1. Modern manufacturing industrial sector
• This sector uses reproducible capital
• Production is for market and profits
• There is modern methods of industrial organization,
and labor is employed on wage basis
108
2. Agricultural sector: it is assumed
to represent the subsistence or traditional sector.
• This sector uses non-reproducible land on
self-employment basis (family base without payment)
• Output is produced mainly for self-consumption with
inferior techniques of production
• This sector containing surplus labor in the form of
disguised unemployment
• Therefore, as long as high population exists in rural areas,
the marginal productivity in agriculture is taken to be zero
where as the average productivity is assumed to be
positive and equal to the bare subsistence level.

109
• In the modern sector however, the productivity or
output per head is assumed to be much higher than that
in agriculture due to low population density.
• Thus, the demand for labor is high in modern sectors of
urban areas.
• In addition to this, since laborers are hiring on wage
payment and output is producing for profits, the
modern urban industrial sectors will draw surplus labor
from the subsistence agricultural sector.
• According to Lewis, given unlimited supply of surplus
labor from rural agricultural sector to urban industrial
sector, the wage rate in the modern sector is determined
by the average productivity in the agriculture and
assumed to be constant.
110
• However the wage rate is assumed to be constant,
Lewis suggest that, urban wages have to be at least
30% higher than average rural income.
• This is in order to attract laborers from countryside to
the urban industries as well as for meeting the higher
cost of urban living.
• In this setting, the model shows how the expansion in
the industrial investment and production (capital
accumulation) outside agriculture will generate
sufficient employment opportunities so as to absorb all
the surplus labor from agriculture and elsewhere.
• The process of expansion and capital accumulation in
the modern sector and the absorption of labor by it is
explained by the following figure.

111
112
• OS represents the real income which a worker would
be getting in the subsistence agricultural sector. And, OW
is the wage rate which is fixed and higher than OS by 30%
in the modern sector.
• So, as long as surplus labor exists in the economy
any amount of labor will be available to the modern sector at
the given wage rate OW, which will remain constant.
• With a given initial amount of industrial capital, the
demand for labor is given by the marginal productivity
curve MPL1.
• Thus, given wage rate OW, the modern sector will
employ OL1. With this the total share of labor in the
modern sector will be OWQ1L1 and WQ1D will be the
capitalists’ surplus. 113
• Now, Lewis assumes that all wages are consumed and all
profits saved and invested. When the capitalists reinvest
their profits for setting up new factories or expanding the
old ones, the stock of capital assets in the modern sector
will increase.
• As a result, the demand for labor will increase or marginal
productivity curve of labor will shift outward, for instance
from MPL1 to MPL2 in the diagram. With
MPL2 , OL2 amount of labor will be employed in the
modern sector with a given OW wage rate.
• In this new equilibrium situation profit accruing to the
capitalist will be equal to WQ2E which is larger than the
previous WQ1D.
114
• The new profits of WQ2E will be further invested and capital
stock will increase and the demand or marginal
productivity curve for labor will further shift upward, say to
MPL3 position and employment of labor will rise to OL3.
• In this way, the profits earned will increase and reinvested and
again modern sectors will expand more. As a result,
surplus labor will be absorbed from the subsistence
sector until all the labor surplus is fully absorbed by
• productive
To sumup, employment.
Lewis model with unlimited supply of labor
illustrates that, high wage rate in modern sectors will attract and
absorb the surplus labor in the agricultural sector and this leads
to the increment in the profits of the industrial sectors.
• Profits in turn are the main source of capital formation. The
greater the share of profits in national income, the greater
the rate of savings, capital accumulation and further
expansion through investment.

115
• The of transferring surplus labor from
agriculture
process to industry (modern sector) and
reinvestment of profits helps;
• to change the productivity of backward agrarian
economy
• to create industrialized modern economy which in turn
helps the reduction of unemployment
• Although the Lewis two-sector development model is
simple and important in analyzing the agricultural
and industrial sectors linkages, it roughly
reflects the historical experience of economic
growth in the west and some of its key
assumptions do not fit the institutional and
economic realities of most contemporary
developing countries.
116
The main shortcomings of this theory are:
1. It is difficult to assume, there is high unemployment
(labor surplus) in rural areas and full employment in
urban areas. In most developing countries the reverse is
true.
– There is seasonal labor shortage in agricultural sectors
even in densely populated areas. So, unlimited
supply of labor is not realistic.
– In addition, even if the productivity in rural area is low in
relative to urban areas due to high population,
it is not zero.
2. There is no guarantee that the capitalist will reinvest its
profit. If it did, it may use labor-saving technologies.
So, the creation of employment for surplus labor
cannot be met.
117
3. This model assumes, fixed wage rate in the modern sector
by assuming competitive labour market.
– In reality however, labour market is not competitive.
– For example, labour unions may have monopoly power over
labour supply and hence they can raise the wage rate. At high
wage rate, firms demand less labour. As a result the absorption of
surplus labour again cannot be met.
4. In developing countries, the mobilization of labor
from agriculture to industrial sector is not an easy task.
This is due to;
– extremely low capacity of modern sectors in absorbing all
surplus labor
– traditional practice and customs of the community
– the problem of housing and high cost of living in urban sector,
and so on

118
5. Lewis model neglect the importance agricultural sector
in absorbing surplus labor.
• It is possible to increase the productivity and
production and hence possible to more
employment opportunities through;
– Capital accumulation in agricultural sector
– Adaptation of proper and modern technologies and practices
– Institutional reform and property rights

119
 3.2 Human Capital Centered Model of Development
• The model stresses the importance of investment in
human capital in the process of economic and social
development.
• Human capital implies the mental and physical quality
or ability of people. This can be improved by
education, training, health care and pursuit of some spiritual
methods.
• The classical and neoclassical economists did not
explicitly include the quality of human resources in their
theoretical framework.
• It was Theodore Schultz (1964) who elaborated the
concept of human capital, and explicitly considered the
investment in human capital as important determinant
of economic development.
• He illustrated that, human capital is a precondition
for efficient utilization of any means of production and
general flexibility of the economic system. 120
• The human capital approach to rural development is based
on the following two assumptions, which have been ignored
in the classical theory of development;
1. Human physical and mental capabilities are partly
inherited and partly acquired, and they vary from
individual to individual.
2. Human capital directly contributes to development through its
positive effect on productivity. It also assumed to
help reduction in resistance to the diffusion of new
technologies especially in the rural sectors.
• This model thus focus on physical capital formation
through human capital formation since human capital
development is the base for any development process.
• This model is appropriate for developing countries
where there are a lot of underdeveloped human resource
but is a potential to achieve the development.
121
• Thus, since the implementation of any development policies and
strategies are dependent on the available skilled,
experienced, innovative, and healthy human resources,
human capital formation must be the priority than
physical capital formation.
• However, unnecessary emphasis on education without
appropriate employment creation is found to lead to the
creation of unemployed people.
• So, in the formation of human capital it is necessary to give due
attention;
– to the demand for educated person and their professions
– for provision of educational services and its qualities
– for the creation of self reliable individuals rather than dependent
and work seeking individuals
122
• In rural development, the importance of human capital
formation include;
1. It directly improve the productivity of agriculture
2. It improve the probability of getting off farm employment
3. It leads to improved family planning
4. It improves the health and nutrition of the people
5. It widens the horizons of knowledge and facilitates
diffusion of new technologies by reducing resistance of
rural people
6. It build the risk taking behavior and managerial (decision
making) capacity of the farmers

123
3.3 Uni-modal Approach /theory/
• The central element of a uni-modal approach is the development
and diffusion of highly divisible innovations that promote
output growth through wide spread increase in the productivity
of land and labor in the agricultural sector.
• Uni-modal approach of development theory focus on the
progressive modernization (transformation) of the
entire agricultural sector based on widespread use of a
sequence of technological innovations which
compatible with the socioeconomic structure and
demographic characteristics of the society.
• It helps to exploit the large potential that exists in the rural
economy. That is, it makes possible to raise the productivity
of the agricultural sector by improving of resource uses (use
of labor and land).
124
• In uni-modal theories, institutional innovations are
essential to achieve the rural development through
efficient uses of the existing resources. That is,
– Creation and provision of cooperative services in order to
increase the negotiation power of farmers in the market
– Creation of microfinance institutions to facilitate access to
credit
– Creation and use of civic societies and local community
participation in order to participate the potential
human resource
– Development of research centers and extension services to
generate and diffuse modern way of production and
resource use are important.

125
 3.4 Bi- modal theory (approach)
• Agriculturalists are differentiated and have distinct
classes. There are large scale farmers (agricultural
capitalist), small scale farmers, and land less agricultural
employees
• Bi-modal approach is a modernization strategy that
focus on the transformation of resources to the highly
commercialized sub-sector.
• Bimodal theory focuses on the necessity of the
development of large-scale farm units to agricultural
development.
• According to this theory, agrarian change in can be
achieved by creating capitalist farmers and agricultural
wage laborers.

126
• Advocates of this approach argue that, large scale
farms have strong advantage over small scale
farms. These advantages are related to technical,
financial, and marketing economies. For example,
• large scale farmers have production economies of
scale which related to:
– The use of modern and advanced machines
– Benefit from high level labor specialization
– Better utilization of their farm capacity
– Take advantage of research and development

127
• Large farms also benefit from marketing scale
economies such as transport, storage, information collection
and capacity to build social capital and capacity to bargain for
fair price.
• In addition, large farms have capital market
economies. That is they do not seek to have external finance,
if they want they can easily access it at lower interest rate to
finance their expenditure which is not possible to small farms.
• Thus, bimodal theory states that, large farm scale is
important for the improvement of the agricultural sector.
Thus, peasant farming should be turned to capitalist farming
since it helps employment creation even for small peasants
and landless society through agricultural laborer on payment.
128
• Moreover, given high productivity and efficiency,
the resource allocation will be efficient. That is, peasant will
be able to enjoy the fruit of his/her labor.
• In addition, much of the produced agricultural surplus will
be marketed for the generation of profits which helps to
achieve economic growth and development .
• According to this approach, once economic growth
is achieved, it is possible to create employment opportunities
by expanding industrial sectors even when labor-
saving technologies are used in the agricultural sectors.
• However, the process of creating large farms may create
high income inequality, and also it leads to landless
peasants which may result in higher unemployment
since it is difficult for the industrial sectors to absorb all
surplus labor.

129
• If the non-agricultural (industry) sector does not develop
and fails to absorb the labor force displaced from agriculture
due to mechanization, it can create economic and social
problems.
• These further result in political power imbalance
between the rich capitalists and poor peasants.
• In addition, there is no guarantee and practical evidences
that illustrates large farms are productive and efficient than
small farms in all aspects.
• The application of this approach may also leads to the
exploitation and improper utilization of resources.
• This approach of rural development is difficult to
apply especially in developing countries. Its application is
limited to the existing lack of human and physical capital. 130
 3.5 Integrated rural development
• The development efforts before 1970s were become effective and efficient
in improving the quality of life in many countries through trial and
errors. But, their results are different from country to country
and even disappointing for some countries.
– They were not participative and caused the problem of inequality
– They were up-bottom approach. That is, they didn’t take into account
the valuable socio-economic practices and the interests of the
society.
– Population growth could not be absorbed by the existing rural system
or any other systems, this leading to massive migration to
cities, and resulting in a virtual breakdown of urban societies.
– The measures of improvement were based on improvement in the
productivity and national income without considering the
issue of wealth balance among the society and areas.
131
• Thus, in order to promote equitable, participative and
wide areal coverage development efforts, the concept of
integrated rural development has been introduced and
widely accepted.
• Integrated rural development is an ongoing process which
involving;
– policy intervention and local aspirations
– mobilization and participation of all potential human and non-
human resources including the past disadvantageous
groups like women and other isolated social groups
in the development process.
– identification and formation of linkages among all economic
sectors and all concerned development agents in
order to achieve and sustain the long term viability
and wide-range benefits of the rural community.

132
• In an integrated system, local and central development
systems should work in a dynamic cooperation with each
other.
• That is, both up-bottom (centralized) and bottom-up
(decentralization) decision making practices are
important.
• Centrally designed Strategies and operative decisions
will be negotiated with local communities in order to;
– motivate and participate them in the development process
– implement those strategies in line with the interest and
cultural values of those communities.
133
• Integrated rural development also focus on "area
development schemes" which involve a broad
range of activities that designed to improve;
– production and productivity
– infrastructural facilities and services
– living standards of the community in a given area, etc based
on the existing features of that area.
• That is, integrated rural development take into account
geographical, political, cultural, economical status
and comparative advantages of each areas.
134
• The concept of integrated rural development is built
based up on real facts;
- Rural development is part of the overall socio-
economic development. But, it was ignored
in past development process.
- Development is a system of interrelated social change.
That is, it requires the overall changes in the
existing practices, socio-economic and political
conditions to the better level.
- Agriculture has a multitude functions in the
development process. Basically, it is the source
of food and raw materials for rural society,
for non-rural community as well as for growing
industry.
136
 Objective of Integrated Rural Development
• Integrated rural development is a self-employment
development process. It intended to raise the income
generation capacity of the rural society. This can be
achieved through rural institutional innovations to
provide;
– productive assets, capital subsidy, credits and
agricultural inputs
– education and health services to improve
productivity and skills
– mobilization of existing human and non-human resources
136
 Components of Integrated Rural Development
• Integrated rural development projects should
consider the inclusion of the following components.
1. Income generating sectors
– Agriculture, including crop production and animal husbandry and
the associated hunting, fishing and forestry
– Manufacturing industry, including workshops, handicrafts,
cottage industry, traditional products and products for which the
region is particularly suited.
– Trade, including the encouragement of markets for local products,
serving other areas, sales through traffic etc.
– Tourism, including agro-tourism, special interest and
environmental tourism
137
2. Institutions
– Market for agricultural and processed manufactured
products
– Storage for agricultural outputs and inputs.
– Transportation services for people and goods.
– Supplies of inputs and materials.
– Credit for investment and family requirements.
– Strong community and resource management systems
3. Research
• It is necessary to conduct research in order to generate new
technologies which improve production and productivity of
the society through efficient use of resources.
4. Education and Training
• Education and training are important to produce skilled labor force
to raise productivity in agricultural sector as well as to
encourage manufacturing industry and tourist development. 138
5. Infrastructure
– Roads: transportation is among the most serious constraints that
has to be addressed.
– Utilities: infrastructural services such as water, telephones,
sewerage and electricity are also essential for development and
improved living standards.
– Irrigation: in arid and semi-arid areas irrigation is the major input
for improved farm productivity.
6. Social Services
– Education: Including pre-school which is important for the labor
supply (releasing young mothers for work), primary and
secondary.
– Health: Provision of medical services, notably doctors, hospitals
and medical services
– Welfare: Research is needed on welfare needs (care for old and
retarded people, social problems of the very poor etc.).

139
7. Recreation facilities
• The lack of recreation facilities in rural areas is a major
factor causing young people to migrate to urban areas.
Advantages and Disadvantages
Advantages
– Integrated rural development is the process of development
which involves formation of linkage among all
economic sectors; among government, local
community, NGOs and other concerned development
agents as well as institutions.
– Thus, such participative development activities bring better
and effective development results.
140
Disadvantages
– It requires cost to mobilize all development
high
potentials
– It may makes the management of the development
process complex since it requires integrated and
comprehensive development programs.
 Summing up, the success of integrated rural
development programs depends on the degree to
which a population can be motivated.
 This in turn depends on how much their interests, their
felt needs are taken into account, and to what extent
they are involved in the planning and decision-making
process.
141
3.6 Models of Agricultural
• A number of agricultural
Development development models
were developed and introduced by economists to give
detail analysis about the ways to bring agricultural
development.
• Those models are important and can give policy
alternatives for the decision makers in designing and
implementing agricultural policies and strategies.
• In this section, we will see the following five
important models.
1. The frontier model
2. The resource conservation model
3. The urban-industrial impact model
4. The diffusion model
5. The high pay-off input model
142
3.6.1 The frontier Model
• This model also known as resourse expansion model. It suggest
that, increase in agricultural production occurs as a result of
the expansion in area cultivated.
• The model assumes that, surplus land and labor capacity will
enable peasant producers to expand production rapidly
under the stimulus of new markets even if they will
have poor technology.
• That is, underutilized natural resources should be exploited to
generate growth in agricultural output.
• Population pressure resulting in the intensification of land use
in the existing villages should followed by pioneer
settlement programs and the establishment of new
villages, and the opening up of forest or Jungle land to
cultivation. 143
Example:
• The opening of new continents such as North America,
South America and Australia has created new settlement
for European countries centuries ago.
• Similar events were also seen in Asia and Africa, and to
some extent in the case of Ethiopia in Derg and current
regime settlement programs.
• The major problems (criticisms) of the model are:
– It doesn’t give any emphasis to the sustainability of natural
resources.
– It also doesn’t give due attention for the generation and use
of new technologies and agricultural inputs in
increasing production and productivity on small farm
land.
144
3.6.2 The Resource Conservation
Model
• The conservation model developed at the time
of
English agricultural revolution of 18th century. It
supported by English economists such as
Malthus, David Ricardo and John Stuart Mill.
• The model is based on two assumptions:
1. the model assumes that land and other natural resources for
agricultural production is scarce
2. it also assumes that soil exhaustion to occur which result in
reduction in production.

145
• This model suggest that, high priority should be given
to;
– resource-saving agricultural crop production that
strives to achieve acceptable profits together
with high and sustainable production levels.
– maintaining soil productivity at its present level/to
return soil to its original productive capacity/; and this
can be realized through integrated crop-livestock
husbandry since livestock will provide manures.
• This model also focus on the conservation of
biodiversity, organic and pollution free
agricultural product production.

147
 Criticism of the model
• This model explains the importance of resource
conservation strategy for the sustainable development.
• It also illustrates the importance of pollution free healthy
environment and the production of organic agricultural
products.
• Besides to these importance, this model doesn’t explain
the importance of industrial inputs in increasing
production.
• The production of organic fertilizer takes time and
requires the balance between crop and livestock
production. Imbalance between the two will causes
difficulty in getting enough supply.
147
3.6.3 The urban- industrial impact model
• Urban-industrial impact model asserts that, the
industrial
urban developments stimulates agricultural
development since the demand for food as well
industrial raw materials is become higher. as
• According to this model, urban centers create markets for
the agricultural products and act as a motive force behind
the emergence of agricultural intensification around areas
with proximity to urban centers.
• Moreover, the model emphasizes the inherent
complementarities between industry and agriculture. In
addition to the creation of market for agricultural
products, industrial sector supports the agriculture sector
through production and provision of agricultural inputs.
148
• Development polices based on the urban-industrial
impact on agricultural development appear to have
limited scope in the poorest of the less developed
countries.
A. It may causes the problem of imbalance development
between urban surrounding areas and areas far
away from urban centers.
B. However urban industrial area helps in absorbing
growing excess labor force from rural areas, it
may cause the problem of housing, sanitation, and
requires high cost to provide social services and
utilities.
C. The technology necessary for rapid agricultural growth
is not available.
149
3.6.4 The diffusion model
• The model suggests the diffusion of better
husbandry techniques and practices and of crop and
that,
livestock varieties has been a major source of
productivity in agriculture.
• In stead of generating new techniques and practices, this
model illustrates the importance of effective
dissemination of existing experiences and technical
knowledge to narrow dispersion in productivity among
individual farmers and among regions.
• However, this model doesn’t give any attention for the
importance of the generation of new technologies and
practices in assuring rapid growth in agricultural output.
150
3.6.5 The High Pay-Off Input Model
• This model is also known as the transformation approach
or the quick-fix approach and focuses on two aspects:
1. how to create and provide to farmers the new, higher-payoff
technology embodied in capital equipment and other inputs
2. how to increase the productivity
• The model suggests that, economic growth from the
agricultural sector of a poor country depends upon the
availability, distribution and adoption of modern high-pay
off inputs (fertilizers, higher yielding seeds, technology,
skilled human resource).
151
• In order to provide those productive inputs
and technologies, there is a need to invest on;
1. agricultural experiment stations to produce new
technical knowledge,
2. industrial sector to develop, produce and
marketnew
technical inputs, and
3. education to train farmers to increase their
knowledge on the use of modern agricultural factors
effectively.
Criticism
• The model is incomplete. The mechanism by which
resources are allocated among education, research, and
152
other alternative public and private sector economic
activities is not fully incorporated into the model.
3.6.6 Indian Green Revolution Experience
• The Green Revolution was a period when the productivity
of global agriculture increased drastically as a result of
new advances between 1940s and 1960s.
• During this period, new chemical fertilizers and pesticides
were created and result in higher productivity and hence
increase yield.
• The beginnings of the Green Revolution are often
attributed to a 1970 Nobel Laureate Dr. Norman Borlaug,
an American scientist who was honored for his work in
the 'Green Revolution,' saving millions of lives from
famine in India, Mexico, and the Middle East.

153
 Green Revolution in India
• In India there were sever famine in 1940s, and around 4
million people died of hunger by 1943.
• Thus, action to increase yield came in the form of
Green Revolution to the period from 1967 to 1978
basically in the parts or Haryana and Punjab.
• At this stage concern was to change the traditional way
of farming especially on Wheat and Rice.
• Methods used in Green Revolution include;
1. Multiple Cropping System
2. Seeds with superior genetics (HYV seeds)
3. Proper irrigation system
4. Pesticides and fertilizers
5. Modern machines
6. Expansion of farming areas
154
 Effect of Green Revolution
• By the late 1970s, the Green Revolution raised rice
yields by 35%, wheat yields by 70%, millet and corn by
20% in India.
• The country became self sufficient in food grains by
1974 and became grain exporter in 1978-79. in general
green revolution brought changes in India through;
– Increase in production
– Capitalistic farming
– Rural employment
– Import of food grains
– Development of industries
– Economic growth
– Change in thinking of farmers

155
 Important aspect of Green Revolution
• In addition to producing larger quantities of
food, the Green Revolution was also
beneficial; because
– it made it possible to grow more crops on the same
amount of land with a similar amount of
effort.
– the ability to grow more food on the same amount
of land was also beneficial to the
environment because it meant that less
forest or natural land needed to be converted
to farmland to produce more food.
156
 Issues regarding Green Revolution
• Green Revolution has done a lot of positive things,
saving the lives of millions peoples and exponentially
increasing the yield of food crops.
• But, environmental degradation the
makes Revolution an overall Green
inefficient, only solution to the short-term
problem
– Air andofwater
food pollution
insecurity.
due to extensive use of chemical
pesticides.
– Soil erosion due to extensive use of land, high exploitation
of natural resources and deforestation.
– Unemployment among uneducated farmers and
deadly disease were a serious challenges
and harmful for farmers.
• So, more sustainable and environmental
friendly system of cultivation needs to be practiced.
157
 Exercise
• Briefly explain model and its
Lewis shortcomings.
• Bimodal approach to rural development
underlines that large farmers are more efficient
than small farmers. Discuss on reasons that makes
large farmers more efficient.
• Briefly discuss the integrated rural
development model.
• Briefly explain the frontier model and
its criticism.
• What is green revolution?
158
 CHAPTER FOUR

Strategies and Policies of Agricultural and

Rural Development

159
1. Strategies of Agricultural and Rural Development

• Agricultural Development mainly aims at increasing

agricultural products such as crops, livestock,
fish and etc.
• On the other hand, rural development is the activity
which intended to improve the quality of life
people residing in the rural area; and it
includes agricultural development activities.
• Development cooperation focusing on agriculture and
rural development is a very important component
for poverty reduction; and now seen as an
important part of development strategy in
many countries for the following reasons:
160
• Currently, more than 3.3 billion people live in rural
areas and this number will remain around 3.2 billion
past 2050.
• Out of 1.2 extremely poor people over the world, 75%
of the are residing in the rural areas.
• Many poor people in cities are migrant workers and
farmers who have left rural areas.
• Therefore, effective rural development strategies are
going to be necessary to improve the life of the society
through sustainable development goals in order to
account the growing population over time.
• The potential rural development strategies that can be
followed and implemented by each country are
summarized briefly as follows.

161
 4.1.1 Growth Oriented Strategy
• This strategy is developed based on the assumption
that, rural people like any other people are rational
decision makers, who will try to maximize their
income when they given adequate opportunity and
a proper environment.
• The regulation and coordination of the activities of
private and public agencies is primarily through
market mechanisms.
• The role of the state in this strategy is to build
infrastructure, and maintain a favorable climate to
stimulate the growth of rural enterprises.
162
• The objective of this strategy is to achieve rapid
increase in agricultural production at the farm
level through:
– Effective management and use of resources
– Intensive land use
– Intensive use of high yielding variety seeds and other inputs
• But, this paradigm failed to make any contribution in
solving the basic problems of unemployment
and inequality.

163
 4.1.2 Welfare Oriented Strategy
• This strategy seeks to promote the well-being of the rural
poor population through provision of large scale social
programs. These programs include;
– Applied Nutrition Program
– Mid- Day Meals Program
– Old age pension program, etc
• This strategy focus on insuring facilities and amenities to
the society by fulfilling basic need necessities through
safety net programs to motivate societies towards
development activities
• However, strategies that fail to motivate the society
towards development will may result in the problem of
dependency.
164
 4.1.3 Responsive Strategy
• This strategy is aimed at helping rural people to
help themselves through their own organizations and
other support systems.
• Its concern is with responding to the felt needs of the
rural people as defined by them.
• The role of the government is to facilitate the self-
help efforts of villagers by providing technologies and
resources that are not usually available.
• The critical assumption of this strategy is that the rural
poor will identify and resolve their problems if provided
with minimal support and otherwise left to their own
devices and initiatives.
• Community participation and control of project activities
is the primary performance indicator of this strategy.
166
 4.1.4 Integrated or Holistic Strategy
• This strategy combines all the positive features of the
earlier three strategies, and is designed to simultaneously
achieve the goals of growth, welfare, equity and
community participation.
• This strategy is comprehensive and integrative. Its main
objective is to alleviate the problems of poverty,
unemployment and inequality, and seeks to address the
physical, economic, technological, social, motivational,
organizational and political bases of these problems.
• The multiple goals of this strategy are sought to be
achieved by building the capacity of the community to
involve itself in development in partnership with the
government.
166
4.2 Policies of Agricultural and Rural Development
• Generally speaking, policy implies state intervention in
the economy so as to enhance and ensure the economic
progress.
• The general success of any county economic growth and
development depends on the strength and applicability of
country’s general and sector level economic policies.
• 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.
167
• 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, etc.
• In order to meet these objectives, there are different
distinct policy interventions that widely used in all
developing as well as developed countries.
• Among those policies, agricultural price policy, input
policy, market policy, credit policy, land reform policy,
and food security policies will be discussed in this
section.
168
 4.2.1 Agricultural Price Policy
• Agricultural price policy refers to government
intervention to stabilize prices of agricultural goods to
ensure a reasonable price to the consumer and
producers.
• Motivations to agricultural price policy is to safeguard
the interests of both producers and consumers and
moderate the impact of excessive fluctuations in output.
• Agricultural price policy encompasses both outputs as
well as inputs, because these two tiers are
interdependent
• Agricultural price policy: ‘a policy of the government
whereby it acts to influence or determine the prices of
agricultural outputs and inputs.’

169
 Objectives of Price policy
1. Stabilization of prices: Carried out through fixation of
support prices below which market prices are not allowed
to fall
2. Induce greater production: to motivate farmers to produce
more agricultural outputs in order to earn more revenues.
3. Supply of food to urban consumers at reasonable and just
prices
4. Generate public revenues: to fix the price at which the
government purchases the agricultural commodity, and
the price at which they are
Price Fixation Criteria
– Cost of Production
– Parity index between competing crops
– Import Parity Price
– Export Parity Price
– Buffer Stocks
170
4.2.2 Input Price Policy
• It is designed to influence the prices and delivery systems of
purchased variable inputs (fertilizers, improved high
yielding varity seeds, pesticides, etc) used in farm
production.
• Improvement in the physical flow of inputs, information
provision for farmers about the type, quantity and
combination of inputs suitable for farm systems are the
concerns.
• Objective: to help farmers adopt new technology and
expand production and income, thereby enabling them to
stand on their own legs.
• Care to be taken: this policy involves input subsidy and
low input price setting. But, inputs subsidy should only be
temporary (it should not be continued indefinitely).
• Low input price may lead to unwanted substitutions
(Chemical fertilizers might be extensively used instead of
organic manure) 171
 4.2.3 Marketing Policy
• It is concerned with two fundamental activities.
1. Transmission or movement of farm outputs from the
farm-gate to the final users.
2. Quantity and price signals among producers and
consumers.
• 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 traditional starting point for analysis of markets is
the concept of adding utility to a commodity through the
following three ways.
172
a) Form utility: changes in the physical attributes of the
commodity between farmer and consumer (grain to
bread) through grading through sorting,
cleaning, labeling, packaging, etc.
b) Place Utility: marketing creates place utility by
transporting output from its point of production to
point of consumption.
c) Time utility: this refers to all aspects of storage between
time of harvest and sale across seasons and /or years.
• At each utility price of the commodity differs and the
difference between the price at which a final consumer buy
and the price at which farmer sales at harvest is called the
marketing margin. 173
 Objectives of marketing policy
– To protect farmers and 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

174
 4.2.4 Credit Policy
• It is concerned mainly on the provision of
working capital for the purchase of variable inputs
that used in farm production.
• Specifically this policy focus on:
a. alleviating a critical constraint which hampers
growth in agricultural output,
b. replacing the fragmented and incomplete rural financial
market dominated by selfish private money-lenders,
c. accelerating the adoption of new technology by peasant
farmers, and
d. achieving equity goals, whether these are
intra-rural, inter-regional, or rural-urban income
distribution.
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 4.2.5 Land Reform Policy
• It seeks to alter the ownership distribution or conditions
of access to land as a resource in farm production.
• It involves a wide range of social changes including
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.
• Unlike to other types of policy intervention, land policy
is a sensitive issue and is a special case. Because;
i. Land is more than everything else in farm production
ii. Land ownership structures is the indicator of social status and
power in the agrarian economy.
iii. Land reform is often associated with political and social
conditions and can cause social upheaval upon which the
implementation of other policies is typically depend.
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 Objectives of land reform policy
• The main objective of land reform emanates
from some concept of social justice and
basically focus on:
– Poverty alleviation
– Equality and income distribution
– Efficiency
– Increase in agricultural output so as to enlarge the
size of the domestic market as economic
development proceeds

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 4.2.6 Food Policy and Food Security
• Food is a basic human need and plays a crucial role in
the agro-based economy where a large proportion of the
income of the population is allocated to food.
• The first and foremost responsibility of the State is to
secure its citizens to the provision of basic necessities of
food at all time by formulation and implementation of
proper food policy.
• Food policy concerned with the integration of state
actions affecting the supply, distribution, and
consumption of food in order to ensure the continuity of
access to enough food for all the people in a country.
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• Its aim is also to ensure food security in order to avoid
famine and under nutrition so as to attain minimum
health and energy requirements of human being.
• Assuring food security directly involves securing the
availability of enough food supply and the ability of the
society to acquire it over time.
• Food security of the society can be achieved through;
i. increased efficiency of domestic
agriculture and
ii. enhanced
sustained availability
increaseof adequate
in supply
the of safe food
incomes
of the poor and the distressed to
iii. enhance their access to food
appropriate programs to reduce malnutrition

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• In general, the goal of the food policy is to ensure a
dependable food security system for all people of
the country at all times; and its objectives are:
1. to ensure adequate and sustainable supply of
safe and nutritious food through increase in food
production
2. to enhance purchasing power of the people for increased
food accessibility
3. ensure adequate nutrition for all

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 Important issues in food policy
1. To serve the urban poor, there is a need for keeping
food prices sufficiently low. However, low prices for
consumers can be a disincentive for farmers to
produce more food, often resulting in hunger, poor
trade prospects, and an increased need for food
imports.
2. In a more developed countries like USA, food and
nutrition policy is viewed in context with strive to
ensure farmers earn relatively stable incomes despite
price and supply fluctuations and adverse weather
events through subsidies.
 The cost of subsidizing farm incomes is passed along
to consumers in the form of higher food prices.

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NB
. However policy intervention in agricultural and
rural development is important in each and every
county;
- the formulation and implementation of those policies must
be country and regional specific.
- the success of strategies and policies is depend on the
strength and political commitment of the government as
well as the extent to which government, community, and
other private and donors are integrated.

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 Exercise
• Write the similarities and differences between
policy and strategy.
• Briefly discuss the potential rural development
strategies.
• Discuss the policies of agricultural and
rural development.
• Why do countries set agricultural
product pricing policy?

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