Motivations

1. Motivations • In LDC absence of developed capital and insurance markets leave households and individuals vulnerable to idiosyncratic and covariate or economy wide shocks • In particular the poor are most vulnerable

2. Perspectives • Does agriculture as a sector offer any help in managing the effects of macro shocks? (Macro perspective) • Does agriculture as an economic activity of the household help in managing the effects of individual/household level shocks? (household perspective)

3. Definitions of ‘Buffer’ Role Macroeconomic perspective • the sector’s ability to sustain and improve the economy’s resilience to external shocks Household perspective • the sector’s ability, as a source of economic activity of the household, to support informal safety nets that can substitute for non-existent or unavailable formal safety nets, for missing credit and insurance markets

4. Two overlapping approaches Macroeconomic perspective • Focus is on countercyclical behaviour of agriculture when other sectors are hit by a shock That depends on: • the type of shock and on… • a ‘cushioning’ policy environment • the ‘output mix’ of tradables vs NT • the transmission of prices • the importance of intersectoral linkages (production and consumption)

5.  Macro perspective (cont.) But very importantly: • The extent to which agriculture is more labour intensive than other sectors • The flexibility with which labour markets adjust to inter-sectoral difference in wages

6.  Macro perspective (cont.) Two types of ‘sub’approaches: • Focus on intersectoral linkages and labour flows: Intersectoral approach. • Chile, Indonesia, Mali, DR If agricultural is countercylical, no safety nets in place, no credit or insurance markets, then urban labour market shocks will make movement into agriculture an option

7.  Macro perspective (cont.) But switch to agriculture has high information and relocation costs: migrants have an advantage as they may have option to return, analogous to an insurance policy Nota Bene: idiosyncratic employment shocks in urban areas can be managed in short time without relocation. The issue is co-variant (or aggregate) shocks.

8.  Macro perspective (cont.) If return option is important, then remittances may be seen as ‘premium’ paid by migrant to return productively at farm-home But remittances have other self-interested motivations (e.g. inheritance) as well as truly altruistic motivations : Remittance approach • DR, Ethiopia, Ghana, China

9. Household perspective (safety net approach) Informal safety nets have better chances of emerging ad persisiting when: • Shocks are relatively more frequent • Monitoring costs are lower • Punishment is credible threat • Income differences among participants not too wide Rural village communities where agriculture is predominant activity display many of these features • Mexico, South Africa

10. I. Mali – 1994 CFA Devaluation • Maize & millet (NT), rice (T) main staples • Price of rice rose 50%, but maize and millet 14% during 94-95 • Supply response of maize and millet allowed consumers to buffer consumption • Labour market: Rate of participation increased, especially women and children; • Cotton areas (also fruits and potatoes) absorbed many migrants: labour intensive, tradable crops with low entry barriers (costs)

11. I. Indonesia (1997/98 crisis cum devaluation) • Economy recession –13.8%. Agriculture –1.3% • Credit crunch in urban areaslabour mkt shock • Semi-flexible urban labour mkt implied adjustment via prices (wages) and hours worked • Poverty rose 100% in urban areas, 50% in rural • Important to distinguish b/w tradable and NT • Response varied spatially, with tradables (except rice in part) increasing labour demand • Switch to agricultural labour mkt may be not so easy (lost skills). • Small size of farms in Java also a constraint • Non-farm rural activities absorbed labour better (but farmers purchase non-farm output)

12. I. Chile (CGE) • CGE model, 23 sectors and 10 income groups • Simulate impact of shocks on hh income, with hh ordered by deciles, and on labour mkts • Compares impact with ag ‘frozen’ and ag free • Terms of trade shock (oil and copper prices) • W/o agriculture (extended definition) income of first 5 deciles fall by 7% more • Labour markets play important role, as well as labour intensity of agriculture • Separate report shows importance of forward and backward linkages in definition of what is agriculture (output mix again)

13. I. Dominican Republic (CGE) • Shocks: devaluation and real price of oil Exchange rate shock (separates export & other crops): • Production of sugar, rice and food processing negatively affected • Sugar and rice important for small producers • But agricultural export crops increase labour demand, absorbing expulsed by other industries Real price of oil shock: • Private consumption falls, so does production from EPZ • Agrc. Value added increases and real wage falls due to input substitution

14. II. Ghana (we saw) • But let me remark evidence on positive replationship between probability of unemployment and remittances

15. II. Ethiopia: agriculture in crisis offers no buffer • Stark conclusion: Agriculture cannot act as a buffer. • Structural crisis due to demographic pressure and land policy which have lead to small farm size • Very low level of urbanization (15% population) • 4-fold differential b/w urban and rural labour productivity • In spite of high urban unemployment, very little return migration • In fact, altruistic motivations seem to dominate in determinants of remittances (-land size; +female headed hh; +old hh head) • Little demand for return option as insurance policy

16. II. China: hukou and the floating population story • Under houkou, hh need to register residence • Urban migrants and rural hh are largely uncovered by social security in urban areas • Access to land is social security in China • Land policy complementary to migration policies in shaping population balance • Migrants remit 38% of their income • Migrants are mostly male, little education, and young • Decision to remit and size of remittances are explored • Motivations seem largely altruistic (+ effect of job security, migrant’s non-remittance income, assets of hh have no impact)

17. III. Mexico (we saw)

18. III. South Africa: the social role of commercial farms • ZA’s dualistic structure overlaps with 3 social sectors: traditional (25% of rural population), commercial (35%), other (40%) • Traditional provides informal safety nets, but social networks are weakening (outmigration) • Other sector is near urban areas, has access to social services but at disadvantage with respect to urban households • Commercial sector has 4.5 million people, includes owners of farms, their employees and families (at least one permanent worker) • Social security quite articulated at different levels of government • In particular at local level (district, municipalities)

19. III. South Africa: the social role of commercial farms (cont.) • But rural areas are disadvantaged, and poorest local governemnts provided low quality services if at all • Acccess to social services is regarded as universal righht • Commercial farm sector channels formal and informal social services to families attached to it (eg. Access to schools, health, free loans…) • Labour relatioships are changing fast nowadays and becoming more casual: deregulation, liberalization, increasing vertical integration are reducing permanent workers. The commercial sectors is gradually reducing its social role

20. Tentative conclusion: • Agriculture acts as a buffer in many circumstances but not all The buffer role depends on: • Intensity of use of unskilled labour • Flexibility of labour markets • Its productive structure (output mix) • Its linkages with rest of economy (labour markets) Institutional features (e.g. access to land by origin household) shape its function as an insurance policy

21. Tentative conclusion (cont.) Agriculture needs to have a minimum level of activity (per capita income) for buffer to be a meaningful concept Engagement in agriculture improves participation to informal networks. If crowding out is indeed small, there is space for appropriately structuring social policies in rural areas so as to exploit complementarities and maximize impact of given resources