Causes of Low Productivity and Policies to Raise Output in Underdeveloped Countries - Essay Example

Driving the Devil out of Agriculture: Causes of Low Productivity and Policies to Raise Output in Underdeveloped Countries Most people in the world are poor. If we know the economics of being poor, we would know much of the economics that really matters. Most of the world's poor people earn their living from agriculture. If we knew the economics of agriculture, we would know much of the economics of being poor (Schultz 1998, p.329). Lecaillon et al. (1987, p.87) state that the role of agriculture in, and its contributions to economic and social development can be examined at two levels, namely, (1) provide an "agricultural surplus" for the rest of the economy in order to permit forthcoming capital formation to take place outside agriculture and allow thereby the growth of the industry and service sectors, and (2) its contribution to the major developmental objectives such as output, income, employment, income distribution, poverty alleviation, food security and self-sufficiency. According to Schultz (1998, p.329), economists find it difficult to understand the preferences and scarcity constraints that determine the choices that poor people make because they fail to understand is that poor people are no less than concerned about improving their lot and that of their children than rich people are. As poor people reside predominantly in low-income countries, they earn a pittance for their labor, half and more of their meager income is spent on food, and that most of them earn their livelihood in agriculture. Schultz also points out that economic history has also been neglected. Classical economics was developed during the time when most people in Western Europe were barely scratching out subsistence from the poor soils they tilled and were condemned to a short life span. As a result, early economists dealt with conditions similar to those prevailing in low-income countries today. Knowledge of the experience and achievements of the poor people over the ages can contribute much to an understanding of the problems and possibilities of underdeveloped countries today (1998, p.332). According to Emmerij (1987, p.9), the disappointing performance of agriculture in many low-income countries cannot be ascribed wholly to technical factors or agricultural conditions in that unsuitable economic policies can have the effect of reducing incentives to increase output and impending production. In connection to this, Schultz (1998, p.333) argues that differences in the soil productivity1 do not explain why people are poor in long-settled parts of the world, conversely, the state of agriculture in underdeveloped countries. Schultz narrates: "People in India have been poor for ages, both on the Deccan Plateau, where the productivity of the rainfed soils is low, and on the highly productive soils of South India. In Africa, people on the unproductive soils of the Southern fringes of the Sahara, on the somewhat more productive soils on the steep slopes of the Rift landform, and on the highly productive alluvial lands along and at the mouth of the Nile all have one thing in common: they are very poor" (Schultz 1998, p.331). Rather, Schultz cites that though land per se is not a critical factor in being poor, the human agent is. The expectations of human agents in agriculture - farm laborers who both work and allocate resources - are shaped by new opportunities by the incentives [in agriculture] to which they respond. These incentives, explicit in the prices farmers receive for their products and in the prices they pay for producer and consumer goods and services, are greatly distorted in many low income countries (1998, p.332). Governments tend to introduce distortions that discriminate against agriculture because internal politics generally favor urban at the expense of rural people, despite the much greater size of the rural population (Schultz, 1998). The effect of these government-induced distortions is to reduce the economic contribution that agriculture is capable of making (1998, p.332), despite the fact that agriculture in low-income countries has the potential economic capacity to produce enough food for the still-growing population and also improve the income and welfare of people of poor people significantly (1998, p.329). Lecaillon et al. (1987, p.203) explains this social phenomenon in terms of geography by saying that since farmers are very numerous and dispersed geographically, it is very difficult for them to organize themselves so as to form an effective front against the state. On the other hand, urban groups tend to be well-organized, display political clout, and are likely to benefit from state policies. Lecaillon et al. stresses that in this sense, the costs are spread among a very large group of typically small farmers while benefits are concentrated on a much smaller well-organized and vocal group. Another problem is the neglect of the agricultural sector in the development priorities of the government in Third world countries due to the misplaced emphasis on rapid industrialization via import substitution and exchange-rate overvaluation that manifested itself in the massive migration of rural peasants into the teeming cities of Third World countries (Todaro 1993, p.287). Todaro illustrates this by describing that the share of total national investment during the 1950s to 1960s allocated toward the agricultural sector in a sample of 18 least developed countries (LDCs) accounted for only 12% despite the fact that agriculture accounted for almost 30% of gross national output (GNP) and more than 60% of total employment. Lecaillon et al. (1987, p.50) furthers that the pernicious effects of import substitution and exchange-rate overvaluation on the balance of payments which often, when combined with quantitative measures, starves agriculture from necessary imported inputs. There is also the political influence of urban consumers and industry enables them to exact cheap food at the expense of the vast number of rural poor (Schultz 1998, p.332) despite the fact that food and agricultural prices are the major determinants of producer incentives and real incomes, particularly for underdeveloped countries (Norton and Alwang 1993, p.258). For example, urban prices are normally expected to be higher than rural prices for the same food commodity because of transportation costs. If the government sets a ceiling price that is equal in both in rural and urban areas, transporting the good from the rural to the urban area may no longer be profitable (Norton and Alwang 1993, p.251). Norton and Alwang also provide that in some cases governments have been known to set urban food prices lower than rural prices, with the result that food, supplied by imports, is transported from urban areas to rural areas (1993, p.251). According to Schultz, this discrimination is rationalized on the grounds that agriculture is inherently backward and that its economic contribution is of little importance despite the Green Revolution. The lowly cultivator is presumed to be indifferent to economic incentives and strongly committed to the traditional means of cultivation. Rapid industrialization is viewed as the key to economic progress. Policy gives top priority to industry to keep food prices cheap. To illustrate, von Braun and de Haen (1983) cites the complex set of policies the Egyptian government has set since before 1950 that have distorted agricultural prices and output. The policies were initially imposed to transfer resources out of agriculture for industrialization while maintaining low prices for consumers. The policies have evolved in a way that the tax burden in agriculture, resulting from the policies, is no different from that on other productive sectors of the economy while consumer price subsidies have been increasing dramatically. This, von Braun and de Haen note, accounted for more than 15% of total government expenditures in the early 1980s while the distortions caused by the policies is estimated to be the equivalent of 1.5% of the national income. In sum, vicious circles and spirals can thereby be triggered or accentuated by affecting negatively a whole set of agricultural performance indicators (Lecaillon et al. 1987, 50). Also, marketing systems in developing countries operate relatively well, in that prices are influenced by underlying supply and demand conditions, except where governments have intervened with price policies (Norton and Alwang 1993, p.253). Ruttan and Hayami (1998, p.163) agree to this by quoting that market systems in developing countries are relatively underdeveloped, both technically and institutionally and a major challenge facing these countries in their planning is the development of a well-articulated marketing system that is capable of accurately reflecting the effects of changes in supply, demand, and production relationships. Norton and Alwang (1993, p.253) enumerate the following principal weaknesses in marketing systems in developing countries, with the magnitude of each differing across regions and countries: (1) infrastructure deficiencies, (2) producer's lack of information, (3) the weak bargaining position of producers of certain commodities, and (4) government-induced market distortions. The most visible effect of such weaknesses is the large spread between prices producers pay for their products and the retail prices. To offset these systems, governments must provide the infrastructure required for an efficient marketing system, particularly roads; a marketing information system [i.e., investments in data collection and dissemination and ensuring equal access to information]; a commodity grading system [i.e., offer premiums for higher-quality products]; and regulations to ensure the rights of all participants [i.e., influencing the enforceability of contracts] (). In a case study done by Lecaillon et al. (1987, p.92) in Kenya, they found out that agricultural performances were very mediocre, posting an average growth rate of only a little more than 1.0%. These performances were attributable to a combination of several unfavorable factors, including lower real prices, inadequate supplies of inputs and manufactured goods and heavier taxation on commercial crops. This was also accompanied by price distortion where nominal prices of food crops increased by four times from 1970 to 1980 while those of exports doubled. As a consequence, Lecaillon et al. note that the volume of these crops fell sharply and farmers increased food production to sell it to the parallel market. These price movements were also associated with a change in commercial structures which also discouraged producers; 1976 saw the abolition of the marketing cooperatives and the transfer of their monopoly to inefficient parastatal organizations (Lecaillon et al. 1987, p.92). Todaro (1994, p.47) cites that throughout the developing world, levels of labor productivity (output per worker) are extremely low compared with those in developed countries. In lieu of agriculture, low levels of labor productivity can be explained by the absence or severe lack of "complementary" factor inputs such as physical capital or experienced management. Todaro also notes that the area of physical health most clearly reveals the close linkage that exists between low levels of productivity. It is well known that poor dietary habits, inadequate food and low standard of personal hygiene can further deteriorate a worker's health and can therefore adversely influence his or her attitudes toward the job and the people at work. Schultz notes that human capital contributes to labor productivity and entrepreneurial ability valuable in farm and non-farm production (1998, p.334). Hence, to promote more productivity per hour in agriculture, better health and vitality must be brought through better investments in health capital and education in underdeveloped countries (Schultz 1998, p.335). With regards to investments in technology, Ruttan and Hayami (1978, p.175) state that an essential condition for success in achieving sustained growth in agricultural productivity is the capacity to generate an ecologically adapted [in tune with initial resource endowments] and economically viable agricultural technology in each country or development region. Lecaillon et al. (1987, p.16) also acknowledge the external constraint in agricultural production brought about by declining external terms of trade, particularly in the case of Sri Lanka in the six countries considered in their study.2 They found out that a combination of stagnant or falling prices for agricultural exports and sharply increasing import prices [perhaps best exemplified in the sixfold increase in oil price between 1973 and 1981] in all six countries had a large and significant negative effect on performance but nowhere more so than in Sri Lanka where the ratio of export prices to import prices fell from 183 in 1960 to 41 in 1981 [1970=100]. The negative impact of these international price movements could, in theory, have been alleviated through appropriate export diversification by the countries under consideration. Lecaillon et al. note that an examination of export concentration in the six countries revealed that it was only in Sri Lanka that the concentration of exports declined slightly. Even a hypothetical reduction of tariffs in developed countries would not appear to have any significant impact on export earnings in the sample countries. Some degree of export diversification therefore may well be the only way to relax the constraint of worsening external terms of trade (1987, p.16). Proper enforcement of land reform is also crucial for underdeveloped countries. Land reform is needed in many countries because of its potential contribution to improved income growth (efficiency), equity (income distribution), and security (political and economic stability).3 A skewed distribution of landholdings often are not farmed intensively even in countries that are very densely populated. Countries with large landholdings often have a coexisting sector of farms that are too small to provide an adequate living. These extremely small holdings of one or two hectares or less may have labor employed to the point at which its marginal product is close to zero. Thus, reducing the size of large farms and increasing the size of very small farms may be the only way to raise the marginal product of labor in agriculture (Norton and Alwang 1993, p.198). In the Philippines, Otsuka's study (1988) of the impact of the 1962 Philippines Land Reform Code and its implementation in 1973 concludes that the reform has been successful in breaking up large ownership holdings with results of greater social equity and higher agricultural productivity, as tenants adopt the modern seed technology (Binswanger and Elgin 1998 p.316). Todaro (1994, p.289) cites that in many poor countries, agricultural production methods have changed relatively slowly over time and links this technological stagnation to the special circumstances of peasant agriculture, with its high risks and uncertain rewards. Unfortunately, the rapid population growth in rural areas has contributed much to the domination of peasant subsistence and small-scale mixed family farms. As population continues to grow out of rein, greater pressure is exerted on existing resources such as land. In these countries, severe fragmentation of landholdings inevitably followed reaching to the point that production falls below the subsistence level, and chronic poverty becomes a way of life. Peasants are then forced to borrow even more from the moneylender at interest rates that range from 50% to 200%. Expectedly, most of these peasants cannot repay the loan. They are then compelled to sell their land and become tenants with huge amounts of debts. Because land is a scarce resource, they are obliged to pay high rents. The case is different if they are sharecroppers because they typically have to give to the landlord 50% to 80% of their crop. And since labor is abundant, wages are extremely low. Peasants thus get trapped in vise of chronic poverty from which, in the absence of major rural construction and reform, there is no escape (Todaro 1994, p.297, 311). Poorest countries also tend to be the most dependent on their natural resource base and thus have the potential of being the most vulnerable to environmental degradation. These countries find environmental problems particularly difficult to solve because rapid population growth, outmoded institutional relationships, poverty, and the lack of financial resources conspire against solutions (Norton and Alwang 1993, p.207). What happens to these farmers in low-income countries is of no concern to the sun, or to the earth, or to the behavior of the monsoons and winds that sweep the earth (Schultz 1998, p.337). Hence, a sound environmental management is essential for sustainable agricultural development in low-income countries. In sum, perhaps the most important reason is that in developing countries, markets are characterized by widespread imperfections (Todaro 1994, p.588). An example of such imperfections that is applicable in agriculture is the lack of information and the presence of uncertainty that most individual producers and consumers face. Thus in many developing countries, producers are often unsure about the size of local markets, the presence of other producers, and the availability of both domestic and imported inputs (Todaro, 1994). Farmers the world over, in dealing with costs, returns, risks, are calculating economic agents. Within their small, individual, allocative domain they are entrepreneurs tuning so subtly to economic conditions that many experts fail to recognize (Schultz 1998, p.333). On the other hand, consumers may be unsure about the quality and the availability of the products and their substitutes. Moreover, in contrast to developed countries, Third World producers and consumers lack the tools to extract this information. The government might attempt to provide this information but this is obviously too costly on a large scale, or it may decide to intervene in the market by guiding producers and consumers (Todaro 1994, p.588-589). Reference List Binswanger, H & Elgin, M 1998, 'Reflections on Land Reform and Farm Size', in C Eicher & J Staatz (eds), International Agricultural Development , John Hopkins University Press, United States of America. Eicher, C & Staatz, J (ed.) 1998, International Agricultural Development, John Hopkins University Press, United States of America. Emmerij, L 1987, 'Preface', in J Lecaillion et al., Economic Policies and Agricultural Performance of Low-Income Countries, Organization for Economic Cooperation and Development (OECD), France. Lecaillion, J, Morrison, C, Schneider, H & Thorbecke E 1987, Economic Policies and Agricultural Performance of Low-Income Countries, Organization for Economic Cooperation and Development (OECD), France. Norton, G & Alwang, J 1993, Introduction to Economics of Agricultural Development, McGraw-Hill, Inc., United States of America. Ruttan, V & Hayami, Y 1998, 'Induced Innovation Model of Agricultural Development', in C Eicher & J Staatz (eds), International Agricultural Development , John Hopkins University Press, United States of America. Schultz, T 1998, 'The Economics of Being Poor', in C Eicher & J Staatz (ed), International Agricultural Development , John Hopkins University Press, United States of America. Todaro, M 1994, Economic Development, Longman Group UK Limited, United States of America. Von Braun & de Haen, M 1983, 'The Effects of Food Price and Subsidy Policies on Egyptian Agriculture', in G Norton & J Alwang, Introduction to Economics of Agricultural Development, McGraw-Hill, Inc., United States of America. Read More