Energy and cropland the decisive factors are the improvement in population quality and advances in knowledge27

A major constraint on technological improvement in many agricultural sectors is the low level of literacy of farmers and their lack of familiarity with basic concepts of cost accounting and business administration. In the context of a strategy, this issue merits review, along with options for increasing levels of schooling in rural areas and improving farmer literacy and numeracy. The Government of Mexico, for example, has recently decided that the human capital constraint is so dominant that it has initiated a program of financial transfers to rural families as a function of the rate of school attendance of each family's children.

27. Theodore W. Schultz, 'Investing in People', in C. K. Eicher and J. M. Staatz (Eds), 1998, p. 329 [emphasis in original].

Empirical evidence regarding the relation of literacy and farm productivity has been compiled in a number of developing countries. Thomas Pinckney studied the impact of education on productivity in coffee-growing villages in Kenya and Tanzania by analyzing survey data. He found that:

Results for the two sites are striking.. . . Holding other inputs constant, output is more than 30 percent higher when agricultural decision-makers can add and subtract two-digit numbers and read and comprehend simple paragraphs.28

In short, human capital is the most strategic factor for agricultural development as new technologies emerge, markets demand higher quality and safer products, and as consumer requirements for quality and delivery timing change. Learning how to continuously access information and assimilate it is acquiring increasing importance in agriculture throughout the world. Equally, institutions and policies that facilitate such access are increasingly critical, but often Ministries of Agriculture are slow to recognize the importance of quality issues - for all types of farmers.

In countries in which land is scarce, another indicator worth monitoring is the land-to-labor ratio in agriculture. In the early stages of development, with high fertility ratios, the average farm size may decline unless new arable land is opened up. In addition, developing more arable land may come at the expense of forests. In establishing the framework for a strategy, it can be a valuable exercise to analyze population trends, including the rural-urban migration rate, to determine if the growth rate of the rural population is slowing and, if so, how soon it may be likely to begin to decline in absolute numbers, thus reversing the trend toward further fragmentation of farms or additional incursions into forested areas or marginal lands.

Both the logic of improving incentives and emphasis on human resource development point in the same direction of institutional development. Institutions are an integral part of a country's endowment of human and social capital. Virtually all fundamental strategic emphases have an institutional dimension. In the words of James Bonnen:

Clearly a nation that cannot sustain long-term institution building and human capital improvement will never have a highly productive, industrialized agriculture. Just as clearly, long-term institution building and human capital accumulation must involve more than the research and education institutions. Physical capital and conventional input development are necessary for soil and water conservation, reclamation, and development; for long-term, intermediate, and short-term credit; for rural roads, mail service, and eventually electronic communications; and for the development of modern market institutions.. . .29

The role of institutions in the economy has been expressed as follows:

Institutions can be regarded as arrangements among economic agents to attempt to decrease the uncertainty in exchange and ownership (North, 1990).30 Ill-defined property rights

28. Thomas C. Pinckney, 'Does Education Increase Agricultural Productivity in Africa?', in Roger Rose, Carolyn Tanner and Margot A. Bellamy (Eds), Issues in Agricultural Competitiveness: Markets and Policies, IAAE Occasional Paper No. 7, International Association of Agricultural Economists and Dartmouth Publishing Company Limited, Aldershot, UK, 1997, p. 346.

29. James T. Bonnen, 'US Agricultural Development: Transforming Human Capital, Technology, and Institutions', in Bruce F. Johnston, Cassio Luiselli, Celso Cartas C. and Roger D. Norton (Eds), US-Mexico Relations: Agriculture and Rural Development, Stanford University Press, Stanford, CA, USA, 1987, p. 299.

30. Douglas C. North, 'Institutions and a Transactions-Cost Theory of Exchange', in J. E. Alt and K. A. Shepsle (Eds), Perspective on a Positive Political Economy, Cambridge University Press, Cambridge, UK, 1990.

induce opportunistic behavior to capture residual benefits, within and outside firms (Milgrom and Roberts, 1992).31 High transaction costs and uncertainty result from such incomplete property rights. Hence institutional arrangements represent attempts to reduce the uncertainty in exchange, and lower transactions costs, by defining the rules of the game.32

In a rural economy, the scope of institutional development goes beyond reducing uncertainty and transaction costs. In many cases, it facilitates access that previously was completely lacking for a market or a service, at least for some groups of farmers. It can be said that in such cases it reduces transaction costs from infinity to a finite and more manageable level. Perhaps most fundamentally, solid institutions open the doors to new knowledge for farmers and allow them to enter into reliable arrangements for future delivery of inputs and products and deferred payments. If all transactions and payments have to be made on a spot basis, there is little scope for development beyond the village marketplace.

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