Agricultural

Transformation
and Rural
Development
Chapter 4
Overview
Agriculture’s role in Economic Development
Self-sufficiency and Dwindling Food Supplies
Land Tenure and Reform
Technology of agricultural production
Mobilization of Agricultural Inputs
Rural Development Efforts
Agricultural Price Policy
Introduction
Understanding the nature of agriculture is fundamental
to understanding the development.
Income distribution, extreme poverty and the rural
poor
Human capital: Nutrition, food production and
distribution
Contribution of agricultural exports to development
Agriculture is one industry among many, but it
is an industry with a difference.
At early stages of development, this sector
employs far more people than all others.
Agricultural activities have existed for
thousands of years, and so the rural economy
is “tradition bound”.
Crucial importance of land as a factor of
production and the influence of the
weather/climate.
It is the only sector that produces food and
there are no substitutes for food.
Agriculture’s role in Economic
Development
Most of the people in poor countries make their living
from the land.
Most developing countries must rely on their own
agricultural sectors to produce the food consumed by
their people
Farmers must produce enough to feed themselves as
well as the urban population.
The rural sector is virtually the only source of
increased labour for the urban sector.
• The agricultural sector can be a major source of
capital for modern economic growth.
Agricultural exports are a key source of foreign
exchange with which to import capital equipment
and intermediate goods.
The rural population is an important market for the
output of the urban sector.
Self-sufficiency
Food self-sufficiency and the National Defense
argument
Dependence on food imports
Food as a strategic good
Dwindling World Food Supplies
History does not support the view that world supplies of
exportable food are steadily diminishing.
World Cereal Exports

300
m e tric to n n e s , m illio n s

250

200

150

100

50

0
1962 1966 1970 1974 1978 1980 1985 1988 1992 1996 2002
Ye ar
The issue is not about running out of surplus land,
but our ability to increase the yields of existing
arable land to meet the needs of an increasing
population.
Research shows that the planet is not close to its
biological limit.
The real danger of a long-term food crisis arises
from a different source – internal social and
economic barriers to technical progress in
agriculture.
Food Supply and Famine
Famine is far more a problem of food distribution
than of food production.
The central issue is not what caused the crop
failure (drought or civil war) but why no one
intervened to assist those who lost the means to
survive.
Jean Dreze and Amartya Sen blame
“negligence or smugness or callousness on
the part of the non-responding authorities.”
Market forces are often not sufficient to the task of
relieving a famine.
Governments and NGOs must play a role.
Famines rarely happen where a nation is
democratic or governed by some other form of
pluralistic politics, where there are open channels
for communication and criticism such as a free
press.
Mechanisms to end starvation:
Free food shipments to distribution points
Food-for-work programs
The distribution problem must be tackled before
increasing agricultural production.
Land Tenure and Reform
The property rights that matters most in the
agricultural sector is the right over the use of land.
If that right is well defined as well as exclusive,
secure, enforceable, transferable, then farmers have
the incentive to invest and work the land efficiently.
Prevailing land-tenure arrangements are important for
the welfare of farming families and for political
stability.
Patterns of Land Tenure
Land tenure refers to the way people own land
and how they rent it to others.
Serfdom:
prevails in only a few remote areas.

a local aristocrat owns a piece of land and

allows local peasants to cultivate it in
exchange for a part of the harvest.
Peasants and their families are often tied to the
land for life.
Large-scale modern farming or ranching
Large crop or cattle-raising acreage
Plantation agriculture
Latifundos
Family farms or independent peasant
proprietors
Tenancy
Sharecropping
Absentee landlords
Communal farming
Collectivized agriculture
Tenure and Incentive
Land tenure arrangements have a major impact on
agricultural productivity.
From an incentive standpoint, the family-owned farm
would seem to be ideal, however they do not benefit
from economies of scale.
When property rights for the farmer are not well defined
or secure they have little incentive to invest in
improvements or even to maintain existing irrigation
and drainage systems.
Farm labourers are paid wages and typically do not
benefit at all in any rise in production. One solution is
piece-rate pay at harvest time.
Communal and collectivized farming suffer from the
“free-rider” problem because property rights are not
exclusive.
 Work-points in collectivized farming
Land Reform
Reform of rent contracts
Rent reduction
Land to the tiller with compensation
Land to the tiller without compensation
The Politics of Land Reform
The main motive is usually political
Mexico, China and Zimbabwe
Land reform legislation is extremely difficult to
enforce in the absence of deep commitment
from the government.
Land Reform and Productivity
Land reform has greatest positive impact on
productivity where the previous system was one of
small peasant farms with high rates of insecure tenancy
and absentee landlords.
Land reform has the opposite impact if it results in the
breaking up of large, highly efficient modern estates or
farms and redistribution of land to small peasant
proprietors with little knowledge about modern
techniques and the lack of capital to pay for them.
Land Reform and Income Distribution
Usually there is only impact on income distribution if
the land is taken from the landlords without
compensation or without anything close to full
compensation.
Technology of Agricultural Production
Traditional Agriculture
Evidence suggest that these farmers are efficient
given existing technology
Traditional technology changes very slowly
The techniques here are not stagnant but evolve
over time with experimentation.
Slash-and-Burn Cultivation
Trees are slashed and fire is used to clear land. This
is a form of shifting cultivation or farm fallow
cultivation.
 The burnt tree stumps are
left in the grown. Cultivation
seldom involves more than
poking holes in the ground
and dropping seeds into
them.

Madagascar
This system requires a large
amount of land to support a
small number of people, as
after a year or two, yields fall
off drastically and new land
must be cleared.
Ghana
The Shortening of the Fallow
The evolution from slash-and-burn to
permanent cultivation, growing one crop on a
piece of land once per year and shortening the
period of time that the land is left fallow.
Crops are rotated and fertilizer is assed to
restore nutrients to the soil.
Farming within a fixed technology
The improvements in technique that occur
happened over too long an interval of time to
have anything but a marginal impact on rural
standards of living.
Modernizing Agricultural Technology
Specific inputs and techniques can be combined
to increase production.
Mobilization of agricultural inputs and
techniques
There is no universally best technology for
agriculture
Japan vs. United States
1. The Mechanical Package
Tractors, combines, and other forms of machinery are
used primarily as substitutes for labour that has left the
farm for the cities.
The Biological Package and the Green
Revolution
Yields are raised through the use of improved plant
varieties such as hybrid corn or new varieties of rice.
The dramatic effect on yields brought about by the
new varieties is referred to as the Green Revolution.
New varieties raise yields only if combined with
adequate and timely water supplies and increased
amounts of chemical fertilizer.
 The Mechanical Package The Biological Package
Labour Water
Supply

a
a

b b

Machinery Chemical fertilizer

There is little substitutability

Machinery is a good substitute
between water supply and
for labour, so increasing
chemical fertilizer, so
machinery leads to a rise in
increasing fertilizer does not
agricultural output
lead to a rise in output.
 Consumption of Chemical Fertilizer in Developing
Countries

80000
70000
1,000 metric tonnes of

60000
50000 Latin America
nutrient

Far East
40000
Near East
30000 Africa
20000
10000
0
1969 1979 1984 1988 1993 2002
Year

Source: Food and Agricultural Organization: www.fao.org

 Food Production per Capita in Developing
Countries

120

100
(indices 2001 = 100)

80 World
South America
60
Asia
40 Africa

20

0
1975 1985 1997 2001 2003
Year

Source: Food and Agricultural Organization: www.fao.org

Mobilization of Agricultural Inputs

In what ways can a rural society provide itself with

the necessary amounts of labour, capital and
improved techniques?
1. Rural Public Works Projects
Mobilization of labour to create rural capital
(e.g. roads and irrigation systems)
Difficulty lies in the lack of connection between
those who did the work and those who reap the
benefits.
2. Rural Banking and Micro Credit

Farmers often need credit to take full advantage of

their production opportunities.
They typically face unfavourable interest rates. Rural
money-lenders often charge over 100% interest.
Urban commercial banks are usually absent.
Women in particular have difficulty obtaining credit
when they farm land registered in the name of an
absentee husband.
2. The Grameen Bank Model
It targets the poorest of the poor, particularly rural
women
No collateral is required
The borrower is required to join a group from the
same village where members provide support to
each other and ensure repayment.
Bank personnel work with the poor women.
The bank is not profitable on its own and often
requires subsidies from international aid agencies.
Those who repay their loans are eligible for
further credit.
3. Bank Raykat Indonesia (BRI)
Revamped incentive system for rural lending
and saving
Charged interest rates that cover costs and allow
for some profit but still much lower than rural
money-lenders.
Led to a large rise in rural lending and an even
greater increase in rural saving
While they did not target the poorest of the
poor, farmers and small rural businesses that
previously had no access to credit were able to
obtain loans.
System survived the Asian financial crisis of
1997.
4. Extension Services
These institutions provide the key link between
research laboratories or experimental farms and the
rural population.
Relies heavily on the extension worker’s ability to
communicate and instill trust in the farmers.
5. Credit Cooperatives

Small farmers pool funds from which one or two

farmers may borrow.
Farmers take turns borrowing.
Those not borrowing but supplying funds earn
interest and are encouraged to save more.
Farmers’ savings tend to be small and the
cooperatives financially weak.
Economic, social and political conflicts in the village
may make it impossible to maintain the cooperative.
6. The Development of Rural Markets
In developing countries, the existence of an
effectively operating market cannot be taken for
granted.
The to an increasing role for the market is
specialization, and specialization depends on
economies of scale.
In LDCs, the single greatest barrier to taking advantage of
economies of scale is transportation costs.
Therefore, improvements in the transportation system can
have a major impact on productivity.
Farmers in LDCs often limit their dependence on
the market because of the risk it entails.
Farmers face uncertainty in the price of crops between
planting and harvesting.
Most farmers avoid becoming dependent on a single
cash crop and instead devote part of the land to meeting
family food requirements.
Well-intentioned government intervention can
worsen matters. For high-cost rural trading
network, the government often substitutes an even
higher-cost bureaucratic control of the movement
of goods.
7.Roadblocks and Speed-bumps
Land reform, the creation of effective rural credit,
marketing and extension systems as well as
government investment in infrastructure, especially
agricultural research take a long time.
Changes in land tenure can be blocked by powerful
interests.
New plant varieties suitable to local conditions may take
decades to develop.
Government intervention in agricultural pricing
can a have an immediate and profound impact.
8. Agricultural Price Policy
The Multiple Role of Prices
Prices paid to farmers in relation to prices paid for
inputs have a major impact on how much is produced
Prices combined with quantities sold determine farmers’
cash income.
Prices of agricultural products are major determinants of
the cost of living of urban residents
The prices of agricultural products are often controlled
by government marketing boards to earn profits for the
government (in a disguised form of taxation).
The Impact of Subsidies
 Conflict between urban consumers and rural
producers over agricultural prices.
Urban residents are in a better position to lobby
the government to their side resulting in
depressed prices for farmers.
Subsidizing farmers in developed countries
results in surplus production which is often
exported at below world market prices to
developing countries, further depressing prices.
Overvalued Exchange Rates