Lessons from Long Term Models of Agricultural Development

As mentioned in Chapter 1, early theorizing about the role of agriculture in economic development was cast in very aggregate terms and tried to draw applicable inferences from the observation of international patterns. One of those strands of thought was the 'dualistic model' in which the industrial sector was expected to be the engine of growth and to pull resources out of agriculture for that purpose.47 However, strategic recommendations based on this model are based on a misinterpretation, for policy purposes, of the fact that agriculture's share of GDP inexorably shrinks over time. Part of Engel's Law - the fact that income elasticities of demand for food products in the aggregate are less than unity - will alone explain this trend. Contrary to what the early growth theories predicted, neglecting agricultural development has depressed the overall growth rate of economies, and the other side of the coin is that there has been a clear positive association between agricultural growth and the growth of total GDP, as pointed out in Chapter 1. In the forthright words of Hans Binswanger:

The time is long overdue for declaring bankrupt the notion that urban development can solve rural poverty.48

46. Frédéric Martin, Sylvain Larivière and John M. Staatz, 'Success Stories of Adjustment: Results and Lessons from Africa and Latin America', in G. H. Peters and Douglas D. Hedley (Eds), Agricultural Competitiveness: Market Forces and Policy Choice, Proceedings of the Twenty-Second International Conference of Agricultural Economists, Dartmouth Publishing Company Limited, Aldershot, UK, 1995, p. 223 [emphasis added].

47. A leading example of the dual-economy approach is found in John C. H. Fei and Gustav Ranis, Development of the Labor Surplus Economy: Theory and Policy, Irwin Publishing Company, Homewood, IL, USA, 1964.

John Mellor and Bruce Johnston49 tried to derive policy-relevant implications from a more comprehensive theory of agricultural development. Agreeing with other early models that agriculture's primary role includes releasing productive factors for industry, they also asserted that a successful agricultural growth strategy must be aimed at smallholders, and that government must play the key role through investment in human capital, technical innovation and farmer organization. While strong on the role of government, they passed over central issues such as production incentives, property rights, and the need to correct market imperfections, and their prescriptions remained at a general level.50

Timmer attempted to bring aggregate theorizing closer to the realm of policy decisions, observing that neither the Mellor-Johnston approach nor the laissez-faire, urban-driven approach provides adequate guidance to agricultural policy formulation, and that what is needed are 'carefully designed interventions into the prices determined in markets, not by leaving markets alone or by striving to reach the objectives through direct activities of government'.51 He acknowledged the 'heavy analytic costs' of this 'price and marketing policy' but did not mention the governance issues that are often associated with many kinds of price interventions, nor the other disadvantages of attempting to control prices directly which are discussed above in Chapter 4.

As was demonstrated in Chapter 4, the weight of experience has come down on the side of minimizing government interventions in product markets.52 Instead, effort and priority are more productively channeled to improving the functioning of factor markets in agriculture, particularly in the areas of education training (human capital) and for the factor markets related to land, water, credit and technology - the latter being another dimension of human capital. For this reason, the four most detailed chapters of these Guidelines are devoted to policy issues in those areas. In regard to education, which has been stressed previously in Chapter 8, Gale Johnson has made the following points:

The capacities of governments to intervene are legion, except in one area. Governments have seldom, if ever, adopted policies or programs designed to ease the costs of agricultural adjustment as economic growth occurs. . .. The governments of developing countries should learn from the failures of agricultural policies of the industrial countries. A major role for government action is to assist farm and rural people to adjust to declining employment opportunities in agriculture. This means shifting the emphasis from commodity markets, where governments like to intervene, to that of making factor markets work more efficiently. The welfare of farm people depends far more on the functioning of labor markets than on the markets for commodities, yet governments neglect activities appropriate to such markets, such as information and education the critical neglect is that of rural education. . .. For those who worry that assisting the farm adjustment process will result in inundating the cities, there is a very simple answer. If the coun

49. (a) B. F. Johnston and J. W. Mellor, 'The role of agriculture in economic development', American Economic Review, 51, 1961, pp. 566-593; (b) J. W. Mellor and B. F. Johnston, 'The world food equation: interrelations among development, employment and food consumption', Journal of Economic Literature, 22, 1984, pp. 531-574.

50. A useful summary of this conceptual model and others developed at an aggregate level is found in C. P. Timmer, 'The Agricultural Transformation', in C. K. Eicher and J. M. Staatz (Eds), 1998, pp. 113-135.

51. Op. cit., p. 132. See also C. P. Timmer, Getting Prices Right: The Scope and Limits of Agricultural Price Policy, Cornell University Press, Ithaca, NY, 1986.

52. This statement is not meant to understate the value of carefully crafted policies in areas such as product standards, market information systems, certificates of grain deposit, and programs of support for exports such as subsidies for trial shipments abroad of new lines of exports.

tryside is made an attractive place to live and work, through investment in rural infrastructure (schools, roads, electricity, communications), the flow of people to the city will not be of concern.53

The 'historical model' of Vernon Ruttan and Yujiro Hayami is one of the richest of that genre in policy implications. Their model emphasizes the fundamental role of technical innovation in agricultural development, and it also states that the nature of innovation is heavily influenced by relative factor prices and also by real prices of agricultural outputs. In an article first published in 1980, Ruttan made the case that technical change in agriculture has become the single most important factor in determining agricultural growth possibilities:

Prior to this century, almost all increase in food production was obtained by bringing new land into production. ... By the end of this century almost all of the increase in world food production must come from higher yields - from increased output per hectare.54

Together, Ruttan and Hayami hypothesized that whether innovation tends to be land-saving or land-intensive depends crucially on the relative prices of land and other inputs:

There is clear evidence that technology can be developed to facilitate the substitution of relatively abundant (hence cheap) factors for relatively scarce (hence expensive) factors in the economy. The constraints imposed on agricultural development by an inelastic supply of land have, in economies such as those of Japan and Taiwan, been offset by the development of high-yielding crop varieties designed to facilitate the substitution of fertilizer for land. The constraints imposed by an inelastic supply of labor, in countries such as the United States, Canada and Australia, have been offset by technical advances leading to the substitution of animal and mechanical power for labor.55

Ruttan and Hayami state that innovation is also influenced by factors other than relative factor prices and point to the role of institutions. Historically, labor-saving technical change (e.g. mechanization) has tended to be in the hands of the private sector, whereas producing land-saving innovations (e.g. higher-yielding varieties), tends to be in the domain of the public sector. This allocation of effort corresponds to the fact that the benefits of mechanization can be internalized, that is, captured by the firm producing the machinery, while the same is usually not true for the benefits of biological innovations. New plant varieties can be widely reproduced, and new cultivation techniques can be copied. These authors contend that the direction of public sector research also is endogenous to a degree, since the allocation of public funding to research tends to respond to perceived constraints in the sector and since basic scientists and applied researchers often collaborate in solving real-world problems.

In their view, institutional innovation responds in part to the same influences. Creating public sector institutions for agricultural research:

represents an example of a public sector institutional innovation designed to realize for society the potential gains from advances in agricultural technology. ... It is unlikely that institutional changes will prove viable unless the benefits to society exceed the cost. Changes in market prices and technological opportunities introduce disequilibrium in existing institutional arrangements by creating profitable new opportunities for the institutional innovations.56

54. Vernon W. Ruttan, 'Models of Agricultural Development', reprinted in C. K. Eicher and J. M. Staatz (Eds), 1998, p. 155.

55. Vernon W. Ruttan and Yujiro Hayami, 'Induced Innovation Model of Agricultural Development', in C. K. Eicher and J. M. Staatz (Eds), 1998, pp. 163-164.

Things like the wages for agricultural researchers matter greatly. Ruttan and Hayami point out (1998, p. 169) that 'response of public sector research and extension programs to farmers' demand is likely to be greatest when the agricultural research system is highly decentralized' and urge flexibility in the role of the public sector in research and in institutional innovation in general:

Profitable opportunities, however, do not necessarily lead to immediate institutional innovations. Usually the gains and losses from technical and institutional change are not distributed neutrally. There are, typically, vested interests that stand to lose and that oppose change. There are limits on the extent to which group behavior can be mobilized to achieve common group interests the process of transforming institutions in response to technical and economic opportunities generally involves time lags, social and political stress, and in some cases disruption of social and political order. Economic growth ultimately depends on the flexibility and efficiency of society in transforming itself in response to technical and economic opportunities (1998, p. 172).

One of the implications of the Ruttan-Hayami work is that innovation should respect a country's relative resource endowments if it is to contribute effectively to agricultural development. A concomitant conclusion from their research is that inappropriate pricing policies, which reduce agricultural profitability and therefore reduce land prices, may give the wrong signals for technical change, encouraging labor-saving innovations (mechanization) when labor is abundant and it is land that is scarce. This perverse result can also occur as the result of tariff and financial policies that effectively subsidize capital in the form of machinery.

Another policy-relevant implication is that, since institutional innovation is driven partly by incentives and profitability, low incentives in the sector can create a vicious circle: agricultural growth is slow as a result of low incentives, but the lack of incentives also means that the innovations needed to accelerate the sector's growth are unlikely to be forthcoming. El Salvador provides an illustrative case, where one of the obstacles to improving agricultural education has been the lack of attractive prospects in agriculture for youths who are selecting their future careers, owing to the sharp and sustained decline in real agricultural prices that had been brought about by an appreciating real exchange rate.57

To try to break this vicious circle, public policy for agriculture needs to place firm emphasis on creating and sustaining a capacity for agricultural research and extension, and orienting it in directions that are consistent with the country's comparative advantage. In the words of Ruttan and Hayami:

If the induced development model is valid - if alternative paths of technical change and productivity growth are available to developing countries - the issue of how to organize and manage the development and allocation of scientific and technical resources becomes the single most critical factor in the agricultural development process. It is not sufficient simply to build new agricultural research stations. In many developing countries existing research facilities are not employed at full capacity because they are staffed with research workers with limited scientific and technical training; because of inadequate financial, logistical, and administrative support; because of isolation from the main currents of scientific and technical innovation; and because of failure to develop a research strategy that relates research activity to the potential economic value of the new knowledge it is designed to generate (1998, p. 173).

Ruttan and Hayami also underscore the role of complementary sectoral and macroeconomic policies, especially those that influence prices:

57. Roger D. Norton, 'Perspectivas y opciones para la Escuela Nacional de Agricultura "Roberto Quiñónez" report prepared for the Ministry of Agriculture and Livestock, San Salvador, El Salvador, 1998.

One of the most important. .. areas for public investment is the modernization of the marketing system through the establishment of the information and communication linkages necessary for the efficient functioning of factor and product markets. .. . An important element in the development of a more efficient marketing system is the removal of rigidities and distortions resulting from government policy itself - including the maintenance of overvalued currencies, artificially low rates of interest, and unfavorable factor and product prices for agriculture.. . . (1998, pp. 173-174).

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