Chapter 16: Agriculture

Learning Objectives
• [Link] issues in the debate
about food self-sufficiency
and food security. • [Link] importance of road
and irrigation systems,
•
credit institutions, extension
2 Land tenure in developing services, and market
countries and the effect of
property rights on incentives networks and the problems
in agriculture. generally faced in
developing this rural
infrastructure.
• [Link] political and economic
issues relating to land reform
programs. • [Link] pricing policies affect
agricultural output, farmers’
• [Link] of Traditional & incomes, the urban cost of
modern agricultural living, and the government
technologies, including the budget.
modern mechanical and
biological packages.
 Schedule of Classes Until Test #4
• Thursday Nov.13- No Class Meeting-due
travel to ASA Conference in Chicago

• Tuesday Nov 18 - Discuss Chapter 17:

Primary Exports & Trade

• Thursday, November 20- Test #4

• (over chapters 14,15,16,17)
 Chapter 16: Outline
• [Link]’s Role in Economic • [Link] of Agricultural
Development Inputs
• Self-Sufficiency and
• World Food Supplies
• [Link] Supply and Famine • [Link] Public Works Projects
• Land Tenure and Reform
– Patterns of Land Tenure
– Tenure and Incentive • [Link] Banking and Micro
– Land Reform & its Politics Credit
– Land Reform Productivity – Extension Services
– Land Reform and Income – The Development of Rural
Distribution
•
Markets
[Link] of Agricultural
Production
– Traditional Agriculture • [Link] Price Policy
– Slash-&-Burn Cultivation
– The Multiple Role of Prices
– The Shortening of Fallow
– Farming within a Fixed Technology – The Impact of Subsidies
– Modernizing Agricultural Technology – Overvalued Exchange Rates
– The Mechanical Package
– The Biological Package and the
Green Revolution
 Key Features of Agriculture
• Most Africans live on agriculture -about
70% on the average. More in countries
such as Ethiopia and Kenya: 80 to 85%
• Tradition bound- Subsistent & Peasant
Agriculture
• Land is a crucial factor or input to
agriculture..
• [Link] Food which has no
substitute
 Role of agriculture to Economic
Development: Contributions of Agriculture
• 1. Food & Fiber Contribution
• 2. Factor (labor & capital) contribution
• 3. Market Contribution: Effective Demand
• 4. Foreign Exchange or Export Revenue
Contribution
• 5. Other Contributions- A way of life?
 Food Supply
• Food self-sufficiency: producing all domestically
• Food Security: domestic prod. & import
• Some arguments of food self-sufficiency-
National Defense- but at what cost? Example
Saudi Arabia
• Food security: Ability to provide access to food
through combination of food production and
imports.
• Food security depends on income
 Food Supply & Population Growth
• Does the existing arable land produce
enough food to meet the demand of
rapidly growing population in Africa?

• The biological capacity with proper

technology can help produce enough food
but may not do so. Why?
• Due to political and institutional barriers
 Food Supply and Famine
• Famine is catastrophic failure of food availability
and access to food caused by natural factors,
wars, and disasters, and bad [Link]
• Famine is also caused by severe national food
shortage that lead to millions of deaths

• Famines are also due to lack income inequality

or lack of access/income by those affected .
• Examples of Historic Famines:
• The Irish Famine, Chinese Famine 1959-61 under Mao
claimed 30 Million persons. The African Famine 1984-86
claimed 8 million
 Famine and Dictatorship
• Jean Dreze & Amartya Sen View: Famines
are result of government negligence & lack
of transparency or absence of free press.
• Famines are not likely to take place in a
country with democracy and free press.
• Chinese (1960-Mao) & Ethiopian case
(1970s 1984-5) are examples.
• These famines occurred under dictatorship
where government controls free press.
 Land Tenure and Land Reform
• Land tenure is about patterns of land access, that take various forms
such as:
• Large scale modern farming and ranching

• Plantation agriculture: use hired labor in rubber, sugar, etc

• Latifundios- Large estates and ranches in Latin America

• Minifundios-Small farms- small farms in Latin America

• Small Family farms: dominant in parts of Asia and Africa

• Tenancy: farms operated with rent paid to the land lord
• Sharecropping a form of tenancy- revenue share with landlord
• Absentee Land Lords- Latin America & Asia
• Communal farming- practiced in Africa
• Collectivize agriculture –former soviet union
Land-Tenure, Political Stability & Democracy

• Citizens that own have a stake in political

order, even if they are poor.

• The History of Landless peasant

population shows rebellion & violent
political changes.

• Historic Rebellions: Chinese &Mexican

revolutions, etc
 Land Tenure and Incentives
• Well defined property rights are important
• Ownership of land that allows for land market
transaction is the best form to promote efficiency
and productivity.
• Share cropping where landlord gets a share and
tenant gets the rest may be fine, as long as
there is security over the land over long term
• Land owned collectively or by the state creates a
free rider and incentive problem.
• The Historic Tragedy of the Commons in Europe
 Land Reform and Productivity
• Impact of land reform depends on the kind of
reform.
• Land reform that secures property rights on
small farmers is the best to enhance productivity

• Turning tenants to owners with well secured

property rights will provide greater incentives to
improve productivity.
• Historic Examples are Japan and South Korea
 Land and Income Distribution
• Land reform that involved confiscation
without compensation is redistributive
• Historic Examples include Russia 1917-
during the Bolshevik Revolution, China-
during the Maoist Revolution
• The effect on Production is devastating
although equity has been achieved
 Technology of Agriculture
• Traditional agriculture is efficient. but poor with
low inputs (T. W. Schultz Hypothesis)
• Farmers respond to price incentives
• Methods of Traditional Agriculture
• Slash-burn agriculture or shifting cultivation
• Shortening of Fallow i.e. time land is left idle to
allow soil to gain nutrients
• Improvement requires the elimination or
reduction of fallow
 Agricultural Technology
• Farming with fixed technology : This is
traditional system with stagnant
technology.

• Modernizing Agriculture involves

Transformation of Traditional Farming
using technology and market principles
 Agricultural Modernization
• Transforming agriculture requires improving
technology aimed at increasing productivity of
labor or land
• Mechanical Technology improved labor productivity
using tractors, combines, etc to substitute for
shortage of Labor- Example US Agriculture
• Biological Package involves increasing labor
productivity through improved crop and animal
varieties such as in Green Revolution in Rice, Maize
or Corn, Wheat, etc Prod.
• See Figures 16.2 & 16.3 for Mechanical and
Biological technology
 Choices of Technology
• Depends on relative price or cost of labor
and capital
• In a labor abundant and Land scarce
economy- Biological Package would be
used. Why?
• In a land abundant or labor scarce
economy Mechanical Technology can be
used. Why?
• Figures 16.4. & 16.5
 The Green Revolution
• GR involves the biological package of
technology that increase yields in food
crops such as Rice & Wheat

• A key component of this package is the

use more chemical fertilizer and improved
crop varieties with adequate supply of
water.
 Mobilization of Agricultural inputs
• Rural Public Works (to build roads, irrigation
systems, and other rural infrastructure)
• Use of unemployed labor in the process
• Rural Banking and Micro-credit: The Grameen
Bank Model of Bangladesh is among the most
successful
• Labor Mobilization of Chinese Communes in
1970s, were abandoned and turned to
household responsibility system starting in 1980.
 Other Rural Institutions
• Extension services are designed to link
agricultural experiment stations and research to
farmers in the field .
• This requires on the level of training of extension
workers
• Rural Development banks
• Effective rural Marketing has improved impact
on agricultural productivity if transportation cost
and risk is minimized.
• Middlemen traders between producer and
consumer and make lots of money
 Agricultural Price Policy
• Market price of agricultural and food play four
key roles
• Price farmers get are income /Price they pay or
cost determines how much they can produce
• Qs= f(Px/Py) where Px= Price of food &
Py= price of inputs such as fertilizer, labor, etc

• Farmers income= Price of output XQuantity of

output or I=Px Qx= If P=10/bu, and Q=1000
bushels. How much is income? = $10,000
 Agricultural Prices
• Price of agricultural and food sold in cities are
major determinant of cost of living of urban
consumers, who are net buyers

• The Price of agricultural and food are controlled

by some African governments and their
marketing boards which buy from farmers at low
prices and sell to urban consumers
• Farm Price controls lead food shortages and low
farm income or rural poverty.
 The Effect of input prices
• If Fertilizer price lowered MC falls from MC1 to
MC2 and rice output increases see Figure 16.6
and vice versa.

• The Impact of subsidies- food subsidies are

demanded by urban residents who are politically
more potent. The effect will be to depress farm
prices and farm income.
• In non-democracies farmers have a little
leverage since there is no freedom of voting to
remove bad governments
 The Doha Round of Trade
Agreements
• The Doha round in agricultural trade makes the
case for subsidies to farmers in rich countries
such as Japan, Europe, USA

• This is aimed to allow African countries to sell in

American and European Markets.

• AGOA: African Growth Opportunity Act under

Clinton Administration is aimed at opening
markets for African products in the USA
The Effect of Marketing Subsidy on
Supply and Demand of Food
• If farmers receive marketing subsidy of P1
to P2, farmers output will rise from q1 to
q2, since the food grain supply exceeds
demand. The excess demand (shortage)
must be supplied through imports or
government rations. (see figure 16.7)
 The Food Market with an
Overvalued Exchange Rate
• If the world price of grain is P2 then domestic
demand is q4 and domestic supply is q2, and
the result is excess supply or surplus grain that
can be exported.

• But, with overvalued exchanger rate represented

by P1 domestic demand q1 exceeds domestic
supply q3 and the country needs to import or
ration the shortage
• See Figure 16.8
 Land Reform
• Reform of Rent Contracts: Long term and
secured land holding and restrict the land lord or
the government to remove tenants.

• Rent reduction may lead to more investment

• Land to the Tiller with compensation to the land
lord: Japan, S. Korea, etc
• Land to the tiller without compensation:
Ethiopian, Zimbabwe. Cuban, Chinese
revolutions
 The Politics of Land Reform
• Land reform can be used to get support for
revolution by rural landless and eliminate
economic base of landless.
• Example-Mexican Revolution of 1911 that
re-distributed land concentration.

• Chinese Land Reform of 1940s &50s abolished

tenancy and converted to the state Control.
• Land Reform without compensation occurred in
Zimbabwe under Mugabe most recently
• Japanese land reform in history was successful
 Summary
• 1. Contribution of Agriculture to Development:
food, labor, effective demand, export revenue
• 2. Famine is a problem of distribution of Food
and can be a result of natural disaster or civil
war. Democracy can go a long way to eliminate
famine by improving transparency & incentives.
• 3. property rights in land tenure system is a key
incentive for farmers to invest on increasing
productivity and protecting natural resources
 Summary cont.
• Two kinds of agricultural technology improvement:
Mechanical and Biological
• Mechanical is labor saving and land using-example
US Agriculture
• Biological is land saving and labor using: example is
Japanese Agriculture
• Mobilizing inputs includes building institutions such as
research, extension system, credit and marketing
systems
• Governments attempt to influence prices paid and
received by farmers have an impact on food production,
farm income, and political stability
 Chapter 17: Primary Exports: Objectives
• [Link] fundamental concept of comparative advantage as the basis
for gains from trade, as well as its major implications.

• [Link] main export characteristics of developing countries, including the

extent to which many of these countries depend on primary exports .

• [Link] primary exports can serve as an engine of growth by

improving resource utilization, expanding factor endowments,
and generating various linkage effects.

• [Link] concepts and facts behind the ongoing debate about barriers
to primary-export-led growth due to sluggish demand growth,
declining terms of trade, earnings instability, and weak linkage
effects.

• [Link] causes and cures of Dutch disease, which has turned many
a commodity boom into a development disaster.
 Chapter 17 Outline
• [Link] Characteristics • [Link] Empirical Evidence
of Developing Countries on Primary-Export-Led
Growth
• [Link] Advantage
• • [Link] to Primary-Export-
• Led Growth
[Link] Exports as an
Engine of Growth – Sluggish Demand Growth
– Improved Factor – Declining Terms of Trade
Utilization – Fluctuating Export
– Expanded Factor Earnings
Endowments – Ineffective Linkages
– Linkage Effects
– Rent Seeking and
Corruption
– The Dutch Disease
 [Link] Characteristics of Developing Countries

• The Basic Features of Exports for developing

and African countries is shown in Table 17.1.
• They are primary and agricultural products
• Ethiopia, Kenya (coffee, tea, hides, etc)
• Ghana (cocoa, lumber, gold..)
• Senegal (bauxite, Ground nuts)
• Nigeria, Angola, Gabon (Oil)
• Zambia (Copper), Botswana ( Diamonds, Beef)
 Comparative Advantage
• Comparative Advantage is about gains from
trade based on the relative cost advantage
• An importing country may have an opportunity to
buy product cheaper than it can produce at
home.
• The smaller the country the greater the gains
from trade: Netherlands, Japan
• A country gains most in exporting goods that it
can produce its abundant resources and
importing products that requires scarcer
resource: Example Saudi Arabia- export Oil and
buy Airplanes from USA. Brazil export coffee,etc
 Example: Production Costs and
Comparative Advantage-table 17-2
• Days/ton Mexico USA
• Days/ton
• Vegetables 5 4
• Computers 30 20
• Relative cost 30/5=6 20/4=5
• (tons of veg. Per computer)
• Who has comparative advantage in computers?
Who has absolute advantage in computers?
• Who should export and import computers?
 Gains from Trade: See figure 17.1
• Before trade both produce and consume at point A on
PPF Curve .
• With trade a country with comparative advantage in
exportable goods can produce at B (i.e) it can specialize
• The country can export or sell the good increase its
production and consumption up along world terms of
trade and achieve higher level of Isoquant at C as shown
on figure 17.1
• But even though the country on the aggregate gains
from trade, not all individuals or groups within the
country necessarily gain. There are gainers and Losers
from trade. The important question is whether there is a
net gain or loss.
 Primary Exports As An Engine of Growth

• Reasons for why Primary Exports can

be an Engine of Growth
– Improved Factor Utilization

– Expanded Factor Endowments

– Linkage Effects