1 Economics of World Agriculture

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Lecture 4

Risk & Adoption of Technology in Peasant Agriculture

Introduction
In the last lecture we demonstrated that for farmers to increase their income, and
thus for the economy to develop economically, production must be enhanced by
technology. Without it, farmers remain poor and the economy underdeveloped,
potentially for thousands of years. More specifically, it is not just the presence of
technology that is important but the adoption of technology. If technology is not
created and adopted economic growth doesn’t occur and farmers’ income remains at
the subsistence level indefinitely.

In the absence of technology it is not surprising to learn (as we did last week) that
farmers remain poor. However, it is often observed that even where it exists,
peasant farmers do not adopt it. Hence we have appear to have farmers shunning
potentially income-enhancing technology. Why? In essence, we will look at an
explanation of why farmers do not adopt technology. Moreover, we will learn
than in many circumstances the reason why peasant farmers do not adopt
technology is not simply because they are too uneducated to do so (although that is
often a contributory factor) but that because given the constraints, it is actually
rational for them not to adopt. As we will see, it all revolves around risk. Given
that peasant farmers have no economic instruments to manage risk, the only
(optimal) solution is to adopt strategy to minimise their exposure to it. Peasant
farmers are thus overly cautious. As we will see Risk aversion it a rational
response to risk, when there are no (or if present highly imperfect) market-based
solutions to risk such as insurance and credit. Whilst risk aversion is rational
approach in such circumstances, it also means that peasant farmers are likely to
resist the income enhancing technologies that they so desperately need – adopting
technology is paradoxically, risky and thus unattractive to them. Consequently, the
farmers that most need to adopt technology, are forced to use strategies that
actually impede technology adoption.

In other words the strategy that keeps them alive (avoiding risk) also ensures that
they remain poor (by resisting technology).

Peasant Farming
What do we know about peasant farming? In the last lecture we showed that
because the subsistence agriculture is starved of technology productivity of labour
is very low and farmers are poor. So ask yourself, why might the adoption of
income generating technology be irrational in such a system? It doesn’t seem to
make sense. Indeed, in the simple economic framework we typically adopt it
wouldn’t be rational, but when we allow for the complexities of peasant farming, we
can see that the optimising world of standard micro-economics is lacking.

Even in what may appear as the simplest of economic systems – that inhabited by
the subsistence farmer – is actually inherently more complex than our standard
model is. One area in which this is manifestly true is in respect of risk. Risk
complicates our simple economic models and thus it is assumed away in the
introductory textbook treatment of optimisation. However, farming is inherently
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risky anywhere in the world but particularly so in LDC since the climates are
tropical (not temperate) and thus more prone to extremes of weather and disease.

What this means is that if we want to model the behaviour of the peasant farmer,
we need to elaborate our models to include risk - a topic that is usually left to
intermediate textbooks. In principle, however, risk is not problem, since economics
textbooks tell us that that the market provides solutions to risk and
uncertainty in the form of personal savings, insurance and credit markets. 1
Ordinarily, insurance and credit markets develop to fill this gap that created by risk.
Obtaining insurance to protect against ex ante risk or credit to deal with the ex post
risk – which is what should occur requires some:

1. financial outlay (savings or credit) and

2. knowledge about the products being offered.

These are in very short supply in geographical dispersed rural areas. Indeed, in
remote rural areas where most people are uneducated such markets tend either to
be non-existent or very imperfect (i.e .prohibitively expensive/exploitative)

Risk Aversion
So what do farmers do when confronted by risk in the absence of these markets?
The rational response is to minimise their exposure to it.The only rational way to
respond to risk in the absence of savings are imperfect credit markets is to be risk
averse, i.e. try to avoid risk in the first place.

If you are risk neutral you are indifferent to an average income of £50 per year or
a fluctuating income of £100 and £0 each with probability 0.5. Both yields the same
level of income on average and thus if you are indifferent to variability of income
both strategies are equally attractive. However, most economic agents do take the
variability (as well as the average level) of income in to account Risk aversion
means that have a preference for a lower but stable income to a higher yet
fluctuating one. In our example the risk averse farmers prefer an average of £40
(derived from £60 and £20 each occurring with probability 0.5) to the average
income of £50 (involving a fluctuating income of £100 and £0 each with probability
0.5.)

A stylised Pay-Off Matrix of Technology Adoption

High Risk Low Risk

Good Year (0.5) 100 60
Bad Year (0.5) 0 20
Average Year 50 40

Given that bad years may involve severe hardship, disease and death, farmers will
prefer to have a stable income which reduces their exposure to such (potentially
fatal) risks. More specifically they will be willing to forgo income in order to obtain
stability. Hence, despite appearing as very inefficient or possibly even stupid, the

1
Note that risk is defined in situations where probabilities of occurrence of certain events are known and
uncertainty refers to situations where these probabilities are unknown .
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behaviour that keeps peasant farmers poor is in fact quiet rational given the
constraints, since it keeps them alive when a more risk-tolerant strategy would not.

A Stylised Pay-Off Matrix of Technology Adoption

Technology Strategy
High Risk (HYVs) Low Risk
(TVs)

Good Year (prob=0.5) 100 60

Poor Year (prob=0.5) 0 20

Average 50 40

In essence, the strategy that keeps them alive (avoiding risk) also ensures that
they remain poor. We have a self-reinforcing cycle emerging since risk aversion
leads to the non-adoption of technology because adoption is always risky and
typically involves some initial outlay (in terms of education, purchase of capital
items etc) which is inhibited by imperfect capital markets. Because of the low
adoption of technology, labour intensity is high, productivity is low and incomes
low. Because incomes are low farmers are risk averse and unable to adopt new
technologies.

Figure 2 : A Self Reinforcing Cycle: Poverty in Peasant Agriculture

Low
Productivity

No insurance or
Non-Adoption credit markets
of Technology Low
Income

Risk
Aversion
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The Green Revolution

The model (gross simplification though it is) points to the existence of a cycle of
poverty in peasant agriculture. In order to break the cycle the constraints must be
broken. Technology and structures that promote or facilitate the adoption, such as
provisions of information/education (what is often called ‘agricultural extension’),
the provision of credit markets, and most importantly the provision of the
appropriate technology itself. As we can see not all technology will break this cycle
– adoption of some technology (labour saving machinery) simply produces
unemployment, develops a reliance on bought-in inputs (erodes sustainability) and
tends to favour larger farm thus concentrating wealth and production in the hands
of fewer large farmers.

You will be encouraged to learn more about the ‘miracle seeds’ and other
instruments of the Green Revolution in your first tutorial, but bear in mind that
virtually all (now developed) countries have been through a sustained period of
agricultural growth. As it is only industry in a pre-industrial society – it follows that
for economic development to get underway, it is agriculture that must adopt the
technology so that it can support an increasingly urban population. In the UK, the
Agricultural Revolution occurred in the eighteenth century. It facilitated large
increases in agricultural output, allowing the population to grow and specialise in
non-agricultural trades –typically in urban centres, well away from the food
producing areas. It was characterised by technologies such as artificial drainage,
new crops (such as turnips and peas) that allowed for improved rotations (no need
for years in which land was ‘fallow’) as well as new forms of mechanisation
(improved ploughs, threshing machines).

Conclusion
A reoccurring theme in these early lectures is that adoption of technology is key to
the economic growth. Whilst this happened ‘organically’ in the now DMEs it was 150
years in the making. In order to accelerate this often very complex process requires
knowledge, technical support and local infrastructure in addition to the funds to
develop and introduce the technology in the first place. Intervention can accelerate
the process - as indeed the successes of Asian Tigers bears testament. They have
taken only 30 years to achieve the same thing. The lesson of the Green Revolution
is the it is one things to develop the technology and another for it to be adopted.

Whilst technology is an important driver in economic development, note that we

haven’t said much about population? In the next lecture we will discuss the third
part of the triangle of economic growth developed in the first lecture and discuss
the relationship between population, food production and economic growth.