CHAPTER TWO

ECONOMICS OF AGRICULTURAL DEVELOPMENT

Structure of Agricultural System in Developing World

Integrated strategies
Over the last couple of years, the disappointment over the results of past development efforts in
many countries has been growing in the world at large. Nobody brought it more emphatically to
the notice of the general public than Robert McNamara in several of his speeches, culminating in
the well-known statement that, in the 40 developing countries for which data are available, the
upper 20 per cent of the population receives 55 per cent of the national income, while the lowest
20 percent receives 5 per cent only. This gap between rich and poor has only been widening so
far, and, in many cases, has led to worse conditions for the poorer segments of the population.
The traditional socio-economic environment of the rural population has often been destroyed
without being replaced by a better alternative. The increasing population could not be absorbed
by the existing rural system, this leading to massive migration to cities, and resulting, in many
cases, in a virtual breakdown of urban societies. Measures for increasing agricultural production
concentrated on the improvement of land productivity in the better areas with larger farms,
leaving behind the poorer masses in the rural areas.

It is noteworthy that the increasing differences between haves and have-nots generated by past
development are not restricted to the widening gap between rich and poor. The same growing
dualism can be observed between regions within countries, and, on a world-wide scale, between
industrial and developing countries. Reference is made to the proceedings of the UNCTAD-
conferences. In the final analysis, the reason for the very unsatisfactory results of past
development efforts seems to lie in the basic approach. This approach can be characterized as an
attempt to promote development by applying economic principles derived from experiences in
developed countries.

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It was not fully realized that the conditions in developing countries were far more different, as
regards for instance factors like;
• the rate of population increase,
• the degree of international communication,
• the educational level,
• the availability of new technologies,
• the value system of the population, to mention only a few examples.
The reassessment of development strategies during the last years tried to surmount the trial-and-
error period and to use the experience of the past to design a new strategy which, it is hoped,
might yield better results. For the development of the rural areas, during recent years, the concept
of integrated rural development has been widely accepted.

AGRICULTURE VERSUS INDUSTRY LED DEVELOPMENT

An Agriculture –Led Growth strategy
Starting from an analysis of the economic expansion of the 1960s and 1970s and of the
adjustments to the crisis of the 1980s, a growth strategy that is centered on the role of agriculture
can be spelled out. In this role, agriculture is not looked on as a source of economic surplus to be
transferred to the urban-industrial sector, as it was during the periods of import-substitution
industrialization and of Dutch disease created by the oil boom and/or the rapid accumulation of an
external debt. On the contrary, we will start from a situation where agriculture is able to retain and
freely dispose of a large part of the surplus it produces, a situation consistent with the effects of
recent structural adjustments on agriculture. The contributions of agriculture to economic growth
are, consequently, markedly different in this strategy from those which the classical and
neoclassical models of the 1960s and 1970s attributed to it. A growth strategy led by agriculture
can make the following contributions to development:
1. The agricultural sector can generate foreign exchange through agricultural exports or by saving
foreign exchange through import substitution. The availability of foreign exchange facilitates the
import of raw materials, capital equipment, and intermediate goods for the industrial sector.
2. Agricultural development can reduce the price of the nontradable agricultural products and of
tradables whose prices previously were maintained above international levels through
government intervention. Reducing the price of food, the main wage good, allows employers to

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 simultaneously increase real wages and reduce nominal wages. This increases the welfare of
workers and stimulates employment and growth in industry by lowering labor costs (Lele and
Mellor 1981). The key instrument with which to introduce this price effect is the diffusion of
land-saving technological innovations.
3. The growth of agricultural income can broaden the domestic market for industry through the
activation of linkage effects with agriculture. While the forward and backward linkages of
agricultural production are important, the most significant are the final-demand linkages that
have their origin in the expenditure of agricultural incomes (Hirschman 1958). By retaining a
larger share of the surplus that it generates, agriculture can serve as a dynamic market for rural
small industries with high labor intensity and low import content.

In summary, a strategy of economic development centered on agriculture can open up a

productive role to peasants and capitalize on the growth and employment multipliers induced by
the growth of agricultural incomes. On the agricultural supply side, there are two entry points.
First, a rising real exchange rate- a product of the adjustments to the economic crisis and,
especially of devaluation of the nominal exchange rate-raises the price of tradable goods (most of
agriculture) relative to the price of nontradable goods (construction, services, and some
perishable agricultural products). The terms of trade for agriculture benefit, in addition, from a
reduction in industrial protectionism. Since the rate of interest and the prices of imported inputs
rise, producers must switch their technologies and activities to those, which are more labor and
natural resource intensive. For price signals to induce an investment response, inflation must also
be brought under control.

The second entry point is a rising productivity in agriculture through the diffusion of land-saving
technological change backed by investments in irrigation, infrastructure, and public goods for the
rural sector. Given the current condition of austerity in public expenditures (one of the basic
components of structural adjustment policies), these investments require giving explicit priority
to the rural sector in the intersectoral allocation of the national budget and increasing the
efficiency of management of public sector funds. Implementation of these two entry points-
equilibrium prices and technological change and investment in public goods- induces a result

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 that has been observed in the last five years: a lagging agricultural sector has become the
relatively most dynamic sector of the economy.
Agricultural Sector
SUPPLY DEMAND

Exports
Macroeconomic Policy Market expansion (NICs)
Appreciation of real exchange rate Inflation control Nontraditional exports
Trade liberalization Higher value – added exports
Agricultural Policy Regional trade, GATT
Reduce anti agriculture biases Import substitution
Budget priority to agriculture Tariffs for investable fundsNutritional gap
Technological change Domestic effective demand growth
Increased public sector efficiency Employment creation in agriculture
Reactivation of agriculture Choice of techniques
Choice of activities
Dynamics of Poverty Labor market rationalization
Nonagricultural employment in the rural sector
Agricultural linkages
Informal rural sector
Rural Development Policy
Regional exports (nonagricultural)
Reduce anti peasant biases
Farm – oriented rural development Credit Income redistribution
Access to assets: land reform and colonization Public work programs
Household – oriented rural development Food subsidies

Fig.6.1 Elements of a strategy to reduce rural poverty

Roles of agriculture in economic development

 Foreign exchange generation or savings
 Low wage – goods prices
 Employment creation
 Generation of effective demand for other sectors
Conditions for success
 Reduction of debt burden
 Improved international terms of trade (GATT, minerals)
 Perceived harmony of interests by more developed countries
 Economic growth Decline in absolute poverty
 Increase in equity

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Agricultural development is not, however, synonymous with rural development. On the supply
side, reorganization of agriculture must be complemented by specific measures to increase
peasant production, to accelerate economic growth, and to reduce rural poverty. Past experiences
have shown that one sector of the peasantry (with sufficient access to productive resources) can
be highly competitive with medium and large farms under two conditions. First, the Nemours
anti-peasant biases that exist in the rural institutions and in the function of the markets in which
the peasants operate must be eliminated. Strong biases do indeed exist, particularly in the access
to credit, appropriate technology, information, irrigation and infrastructure, and other public
goods and services. Markets are also clearly less favorable to peasant producers, because of their
weak bargaining power with merchants, lack of access to public sector marketing facilities, and
the nonexistence of marketing channels, which they directly control. The second condition is that
rural development programs, oriented at enhancing peasant production, be organized to help
remove the main bottlenecks to peasant competitiveness. Even in an unbiased institutional
context these programs will continue to be necessary, because of the large number of peasants to
be serviced and their weak individual ability to have access to public services.

When both subfamily farms and family farms (usually defined as between 5 and 20 hectares) are
included in the peasantry, that sector accounts for a significant share of total agricultural
production. Around 1980, the peasantry accounted for an estimated 40 percent of the gross value
of crop and livestock production- 55 percent in Peru and 80 percent in Bolivia. The peasantry
also plays a significant role in the production of export crops, such as coffee (41 percent) and
cocoa (33 percent). In most countries, however, the peasantry lost ground during the 1960s and
1970s in the share of domestic market for the food products it supplied. For peasants to benefit
from a growing agriculture, they must maintain their share of the domestic market. Elimination
of the anti-peasant institutional biases and promotion of rural development are needed for that
purpose.

Since rural development must now occur in a context of improved real exchange rate and serve
fiscal austerity, the style of rural development programs must be markedly different from that
which prevailed during the decade of oil boom or accumulation of external debt. During the

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 boom of the 1970s, rural development programs were fundamentally instruments to compensate
for the depreciation of the real exchange rate and distribute to peasants their due share of the
public rent.

Today, rural development must:

(1) be seen as a productive social investment and not as a compensatory social welfare program,
(2) be direct at reallocating resources in the small farm sector toward the production of tradable
goods for either import substitution or exports,
(3) promote the use of technologies with a low import content and low capital intensity, and
(4) increase the efficiency of the public of the public sector and, specifically, seek cheaper and
more resource- efficient ways of organizing rural development projects. Increased decentralization
and participation are likely to be for that purpose.

A rising agricultural supply must be accompanied by a simultaneous increase in effective

demand. This is particularly essential for nontradable goods (which, consequently, have an
inelastic demand) and for products with prices maintained above world market level with no
further opportunity for imports substitution. If in these cases income effects do not shift demand,
technological change leads to a falling gross sectoral income and to asset depreciation in the first
case and to an increase in the fiscal cost of agricultural subsidies in the second.

While some peasant production is aimed at the export market, the bulk of the surplus marketed
by peasants is directed toward the domestic food market. Expansion of this market depends upon
the growth of the whole economy and incomes generated in the rural sector, which still harbors
34 percent of the total population and where the nutritional gap is particularly large. Several
programs for the rural sector have the capacity of contributing simultaneously to the generation
of incomes for the rural poor and expansion of the domestic market for peasants’ production.

These programs include

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 (1) The generation of employment in agriculture by eliminating the price distortions and the
subsidies that induce the adoption of labor-saving machinery and the spread of livestock at the
expansion more labor-intensive crops;
(2) The generation of higher farm incomes through greater access to land and water by
means of land reform, irrigation, and colonization programs;
(3) The generation of self-employment in activities that are complementary to agriculture,
such as raising small animals, processing agricultural products, handicrafts, and trade; and
(4) the generation of nonagricultural employment in the rural areas in the industries tied to
agriculture through backward, forward, and final-demand linkages.

Farming System in Ethiopia

Ethiopia's various climate and soil types have created a large diversity of cultivated plants and
natural vegetation. As a result farmers in Ethiopia have developed complex farming system and
cropping pattern in response to this climatic diversity.
These are:
 the small-holder farming system. It is the farming system by private households with small
land size mainly in the highland.
 the pastoral -nomadic system. It is a farming system by private households mainly in the
low land where most of the time households are mobile with their animals from place to place in
search of water and fodder and livestock production dominate the crop production.
 the modern commercial farming system. This is a farming system with small (intensive) or
large (extensive) land size and modern technology meant for commercial purpose.

Small Holder Farming System

In 1991, the smallholder farming system accounted for more than 90 percent of the agricultural
production and for approximately 95 per cent of the total area under crop. It is widely believed
that its relative share must have been increasing since 1991 because of the special attention being
accorded to smallholders coupled with the sharply declining importance of state farms. The
smallholder farming system is characterized by mixed farming, i.e., crop and livestock
production.

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Ethiopia's smallholder farming is characterized by low productivity with very low provision of
infrastructure. Agricultural operations are carried out with the help of traditional tools and
implements. Land preparation is done by ox-drawn plough. Planting is generally done by
manual broadcasting which hampers effective weeding and spraying activities. Weeding and
harvesting are performed manually with hand and sickle. Similarly, threshing is carried out by
animal trampling of the harvested crop.

As a result of the above situation/condition/ crop yields and livestock productivity are very low.
Agricultural production has thus remained much below the nation's food requirements. Although
smallholder farmers contribute to the export of some cash crops such as coffee, pulses and
oilseeds, the volume is extremely low in relation to the potential.

Pastoral Farming System

About 60 per cent of Ethiopia's land area is located in the arid and semi-arid zones and is located
in the lowland, below 1,500 mt.

However, only 20% of the total population of Ethiopia lives in the lowland areas. The people in
this area rely more on livestock for subsistence. The lowland is a home for about 20 per cent of
Ethiopia's cattle, 25 per cent of sheep, 73 per cent of goats and all of the estimated 2 million
camels (IGAD). In addition to feeding 20% of the total Ethiopian population, this system
accounts for the major portion of the country's exports of live animals, in particular cattle.

Commercial Farming System

Commercial farming system is a farming system carried out by local and foreign investors with
the purpose of profit making. It was officially introduced during the Third Five Year
Development Plan (TFYDP), 1968-1973, by the Imperial government of Ethiopia. The
Commercial farming system strategies were envisaged to modernize agriculture and increase
marketable surplus. During that period available government land was utilized for the
establishment of large commercial farms. As a result, many commercial farms were developed
in the Awash valley, the Rift Valley and other areas.

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 After the 1974 revolution, the military government of Ethiopia nationalized all private
commercial farms and turned them in to state farms. Additionally, in many parts of the country
several state farms were developed. In order to manage and expand state farms the Ministry of
State Farms Development and the Ministry of Coffee and Tea Developments were established.

Since 1991, with the downfall of the military government, Ethiopia has started following a free
market economy. As a result of this large scale commercial farms are left to the private sector
and the previous state farms were and are being privatized or liquidated.

The current commercial farms development strategy includes both extensive mechanized
agriculture mainly in the low lands where open land is available and intensive commercial
farming for high value crops mainly in urban areas near main roads.

Conditions for agricultural development

The Influence of World Economic Conditions and Domestic Economic Policies
The interdependence of nations through capital and goods markets mean that economic
conditions abroad can have important effects on domestic economic growth and development.
The cyclical nature of fluctuations in commodity prices and aggregate income levels in the
development world means that the role of agriculture in a developing country is influenced in a
cyclical fashion by events outside the domestic economy. These cyclical fluctuations have had an
especially important impact on agriculture’s contribution to foreign exchange earnings. High
variability in international prices means increased uncertainty related to foreign exchange
availability, and foreign exchange availability, in turn, affects the ability to import needed goods.

During the 1960s and 1970s, several developing countries expanded their exports to more- developed
countries. Others took the opposite strategy. They adopted policies that led to overvalued exchange rates,
borrowed heavily from foreign private and public sources, and imported goods, all of which adversely
affected parts of their agricultural sectors while inflationary pressures grew. In the early 1980s, worldwide
recession and high interest rates, caused primarily by economic policies in more-developed countries, led to
lower agricultural commodity prices and contributed to debt crises in less-developed countries.
Protectionist sentiments increased in more-developed countries, and international markets for manufactured
goods became highly competitive.

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The above series of events forced several less- developed countries to undertake drastic domestic
stabilization policies to control inflation while attempting to generate trade surpluses to avoid
defaulting on foreign loans. Exchange rates were devalued and government expenditures reduced.
Trade surpluses have been generated principally by reducing imports. These policies have in some
cases had a high social cost in terms of increased unemployment, falling real wages, and greater
income inequality. The implications for agriculture of these events are that agriculture’s
contributions to food and fiber production for domestic markets, to foreign exchange generation,
and to market demand Creation for nonfarm consumer goods has become more important, relative
to its labor contribution. Currency devaluations in particular, since they raise the prices of
imported goods relatively to domestically produced goods, have opened up opportunities for
displacing imported foods and fiber without the need for protectionist policies. Scarce foreign
exchange can then be reserved for capital goods, which are essential in many cases for the growth
of the modern industrial sector. This expansion of domestic agricultural production means
increased incomes in rural areas, which can increase domestic demand for goods from the nonfarm
sector as well. Some countries will be able to expand their agricultural exports, despite continuing
protectionist policies in developed countries. Such expansion is particularly possible for those
countries exporting products such as coffee, tea, and cocoa, which tend not to compete with
agricultural products in developed countries. Other countries may have to wait for cyclical
changes in commodity prices to enable them to complete abroad, unless they have made rapid
progress in improving their agricultural productivity. In summary, world economic conditions,
which change from time to time, interact with domestic economic policies to influence the relative
importance of agriculture’s diverse contributions to development.

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 FARMING SYSTEMS RESEARCH AND AGRICULTURAL EXTENSION
Agricultural research generates new or improved technologies and institutions that increase
agricultural productivity, moderate food prices, generate foreign exchange, and reduce pressures
on the natural resources base. Agricultural research can be categorized in to basic research,
applied research, adaptive research, and testing.

Basic research develops knowledge with little or no specific use in mind. Studies of evolution,
genetics, biochemical process, etc., may discover fundamental principles of substantial
significance to more applied researchers, but the specific end use of the research results are often
difficult to identify prior to the research.

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 with in a country or region. A plant variety developed for a broad area may need to be
modified for a specific microclimate. Fertilizer recommendations, methods for controlling soil
erosion, and many other technologies require adaptation to the local setting

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. Improved pesticides,
management practices, or plant varieties are examples pf 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.
All these categories of research are linked and dependent on each other.

In recent years, a number of countries have added a component to their agricultural research
system called farming systems research (FSR) to facilitate the necessary interaction between

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farmers and scientists. While the term farming systems research has been applied to a wide
variety of activities, in its broadest sense FSR is research that treats the farm in a holistic manner
and considers the various interactions in the system.

Each research system must determine the appropriate mix of on-farm and experiment station
research. Experiment station research is needed so that experiments can be run under controlled
conditions that enable particular components of new technologies to be developed and tested
without the confounding of numerous and possibly extraneous factors. However the real world
robustness, profitability, and cultural acceptability of new technologies cannot be assessed
without testing under actual farm conditions. Frequent contact between scientists and farmers
increases the likelihood that constraints and problems facing farmers will be included in the
development and evaluation of new technologies. Because extensive on-farm interaction is
expensive and scientific resources are scarce in developing countries, each research system must
decide at the margin whether additional funds should be spent on-farm or on station to receive
the greatest return from the funds expended.

FSR research Process

Despite the variety of approaches to FSR, most work is distinguished by a set of research
procedures that emphasizes the following sequence of activities:
Diagnosis: This includes various methods for describing the area where research is to be carried
out, understanding current farming practices, and eliciting farmers’ problems and interests.
Planning: Diagnostic information is used to test research priorities, propose improves
technologies, and design an experimental program.
Testing: on farm experiments test promising technologies on farmers’ fields, under their
conditions.
Assessment: Experimental results are assessed using formal agronomic, statistical, and economic
criteria, as well as being reviewed to assure that the conclusions are compatible with farmers
concerns and the characteristics of the farming systems.
Recommendation and extension: various methods are used for diffusing the results of the
research to farmers and monitoring its impact.

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In general the FSR movement has been responsible for focusing attention on resource poor
farmers as clients for agricultural research. It has placed agricultural research scientists in much
close contact with farmers and has provided a wide variety of innovative research methods to
help understand farmers priorities and to test and assess technologies under farmers conditions
and criteria

The development and utilization of new technologies and institutions are critically dependent on
an educated workforce. Rural education is an investment in people that has its objectives
-improving agricultural productivity and efficiency, and
-preparing children fro non-farm occupations if they have to leave farming.
Education may help motivate farmers toward change, teach farmers improved decision-making
methods, and provide farmers with technical and practical information. Agricultural extension is
complementary to other sources of information because it speeds up the transfer of knowledge
about new technologies and other research results. Education helps farmers to acquire,
understand, and sort technical, institutional, and market information. Because rural; education
results in a more productive and efficient agriculture and in a more productive labour force for
non-farm employment, and because of its public good characteristics, most countries-both
developed and developing-finance education, particularly at the primary and secondary levels.
As agriculture in a country shifts from a traditional to a more dynamic, science-based mode, the
value of education increases.

In adult education, often called extension education in agriculture, farmers are the primary
clientele and the programs are mostly oriented toward production problems facing farmers.
Extension accelerates the dissemination of research results to farmers and, in some cases, helps
transmit farmers’ problems back to researchers. Extension workers provide training for farmers
on a variety of subjects and must have technical competence, economic competence, farming
competence, and communication skills. Thus extension workers require extensive training and re
training to maintain their credibility with farmers.

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Rural education is an investment aimed at improving agricultural productivity and preparing
children for non-farm occupations.
Education can enhance information flows and reduce transaction costs. Many types of extension
systems exist, some more structured than others.
Training for extension workers, incentives, clear lines of authority, and strong linkages to
research are each critical for an effective extension service.

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