Chapter 16: Agriculture Learning Objectives

1. 1.The issues in the debate about food self-sufficiency and food security. 2 Land tenure in developing countries and the effect of property rights on incentives in agriculture. 3.The political and economic issues relating to land reform programs. 4.Features of Traditional & modern agricultural technologies, including the modern mechanical and biological packages. 5.The importance of road and irrigation systems, credit institutions, extension services, and market networks and the problems generally faced in developing this rural infrastructure. 6.How pricing policies affect agricultural output, farmers’ incomes, the urban cost of living, and the government budget. Chapter 16: AgricultureLearning Objectives

2. 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)

3. 1.Agriculture’s Role in Economic Development Self-Sufficiency and World Food Supplies 2.Food Supply and Famine Land Tenure and Reform Patterns of Land Tenure Tenure and Incentive Land Reform & its Politics Land Reform Productivity Land Reform and Income Distribution 3.Technology of Agricultural Production Traditional Agriculture Slash-&-Burn Cultivation The Shortening of Fallow Farming within a Fixed Technology Modernizing Agricultural Technology The Mechanical Package The Biological Package and the Green Revolution 4.Mobilization of Agricultural Inputs 5.Rural Public Works Projects 6.Rural Banking and Micro Credit Extension Services The Development of Rural Markets 7.Agricultural Price Policy The Multiple Role of Prices The Impact of Subsidies Overvalued Exchange Rates Chapter 16: Outline

4. 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.. • AG.Produces Food which has no substitute

5. 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?

6. 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

7. 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

8. Food Supply and Famine • Famine is catastrophic failure of food availability and access to food caused by natural factors, wars, and disasters, and bad agr.policy • 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

9. 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.

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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.

20. 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.

21. 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

22. 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

23. 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.

24. 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

25. 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

26. 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)

27. 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

28. 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

29. 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

30. 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

31. 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

32. Chapter 17: Primary Exports: Objectives • 1.The fundamental concept of comparative advantage as the basis for gains from trade, as well as its major implications. • 2.The main export characteristics of developing countries, including theextent to which many of these countries depend on primary exports. • 3.How primary exports can serve as an engine of growth by improving resource utilization, expanding factor endowments, and generating various linkage effects. • 4.The 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. • 5.The causes and cures of Dutch disease, which has turned many a commodity boom into a development disaster.

33. 1.Export Characteristics of Developing Countries 2.Comparative Advantage 3.Primary Exports as an Engine of Growth Improved Factor Utilization Expanded Factor Endowments Linkage Effects 4.Recent Empirical Evidence on Primary-Export-Led Growth 5.Barriers to Primary-Export-Led Growth Sluggish Demand Growth Declining Terms of Trade Fluctuating Export Earnings Ineffective Linkages Rent Seeking and Corruption The Dutch Disease Chapter 17 Outline

34. 1.Export 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)

35. 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

36. 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?

37. 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.

38. 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