5.1 Introduction

5.2 Production and Productivity Growth in Agriculture

5.3 Factors Affecting Productivity Growth

5.4 The Role of Investment

5.5 Conclusions and Implications

References

Agricultural Productivity for Sustainale Food Security
in Asia and the Pacific: the Role of Investment
Hui-Shung Chang and Lydia Zepeda

The focus of this chapter is on improving productivity and food availability as the first step towards sustainable food security in Asia and the Pacific. The overall purpose of this study is to determine how to promote agricultural productivity growth to achieve sustainable food security most efficiently in Asia and the Pacific. The specific objectives are:

1. to examine the trends in agricultural production and productivity growth in Asia and the Pacific;
2. to isolate the sources of agricultural productivity growth; and
3. to determine the relative significance of these factors in determining the success in agriculture of member countries.

Special attention is paid to the role of investment, both in physical and human capital, in maintaining and increasing agricultural productivity. The analysis provides policy implications useful for improving food security.

5.1 Introduction

Ensuring food for all, today and in generations to come, is one of the greatest challenges facing the world community. Food security is defined as the ability of people to meet their required level of food consumption at all times; it is considered by many to be a basic human right. However, about 1.1 thousand million people in low-income, food-deficit developing countries cannot meet such basic needs (FAO, 1997a). Among them, more than 800 million live in rural areas, depending directly on agriculture for their food supply, employment and income. Therefore, boosting the rural economy, particularly through increased agricultural production, is one of the chief means of alleviating poverty and increasing food security (Pinstrup-Andersen and Pandya-Lorch, 1998).

Food security consists of three major components: availability (associated with production and trade); accessibility (associated with income and wealth); and utilization (associated with health and nutrition) (Asenso-Okyere, Benneh and Tims, 1997). While there seems to be a consensus among analysts that current global food production is adequate to avoid widespread famine and malnutrition (Rosegrant and Ringler, 1997), the overall positive trends disguise the disparities in production and distribution of food between regions. The disparities are described by Rosegrant, Agcaoili-Sombilla and Perez (1995) as a two-tiered system of food security, in which rich and rapidly growing economies enjoy abundant, affordable food supplies, while poor, slow-growing countries suffer from food scarcity and malnutrition. This means that the food security problem is, in the main, not one of shortage but of imbalance and distribution.

Another aspect of food security is sustainability. The concerns are: "can food production continue to keep up with demand in generations to come?" and "is the prosperity of the current generation at the expense of the future?" Some analysts believe that the rapid growth in agricultural production in the last few decades has occurred at great environmental cost (Anderson, 1994). That is, over-exploitation has resulted in natural resources being depleted and the environment being damaged. Indeed, the greater intensity of use of land and water resources and chemicals has created problems such as soil salinization, soil erosion, water pollution, pest resistance, etc. As a result, there are signs of declining rates of growth in yields. For example, it has been shown that the average annual growth rate of paddy rice yield in the world declined from 2.42 percent in 1974-82 to 1.78 percent in 1982-90 (Rosegrant, Agcaoili-Sombilla and Perez, 1995). The corresponding figures were 2.62 and 1.66 percent for Asia and 4 and 1.6 percent for China (Pinstrup-Andersen, 1994). Similar results were found for other crops, including wheat, maize, sorghum and other coarse grains.

Similarly, externalities from agricultural production, and related environmental or "green" issues such as climate change, preservation of wilderness areas and biodiversity, animal welfare and food safety, have received increasing attention in the discussion of agricultural policy in recent years (Alston, Norton and Pardey, 1995).

These concerns suggest that sustainable food security is not only about meeting the increasing and changing demand for food now, but about protecting the environment for future generations. Whether and how this is to be achieved depends on a number of economic, social and political factors, both at the national and international levels. Socio-economic factors with potentially significant effects on future developments in the world food situation include: population and income growth, demographic changes and urbanization on the demand side, as well as technological change and productivity growth on the supply side (Rosegrant, Agcaoili-Sombilla and Perez, 1995). Therefore, future agricultural production and productivity growth depend on, among others, a combination of agricultural, environmental, trade and macro-economic policies at the global level.

Although food security issues are multi-faceted, the discussion here focuses on food availability and production in Asia and the Pacific as a first step towards resolving such issues. Particular attention is paid to the role of investment and agricultural productivity in meeting the challenge of sustainable food security.

Seven member countries in this region were selected for in-depth examination: Australia, the United States, China, India, Indonesia, Japan and South Korea. These countries are chosen because of their importance in the food balance both in the world and the region. For example, China and India are predicted jointly to account for more than 30 percent of the estimated global increase in cereal demand (718 million metric tons) between 1993 and 2020 (Rosegrant and Ringler, 1997). The estimated demand increase from China has raised concerns over China's ability to feed itself and the impact of changes in China's trade position on global food balances and prices (Alexandratos, 1996; Brown, 1995; Fan and Agcaoili-Sombilla, 1997). Indonesia is chosen for similar reasons. Together, these three countries account for nearly 70 percent and 40 percent of the population in Asia and in the world in 1996, respectively (FAO, 1997b).

In addition, Australia and the United States are chosen because of their role as major food exporters to the region. Japan and South Korea, on the other hand, represent (newly) industrialized countries that are major food importers. These differences among the selected countries in the stage of economic development, resource endowments and government policy are central to identifying factors in affecting agricultural productivity growth and the role of government policy.

5.2 Production and Productivity Growth in Agriculture

When evaluating the performance of a production unit or the agricultural sector, it is common to use production (the level of output), productivity (output per unit of input) or efficiency (actual output relative to the potential output or best practices) as indicators. Although these measures are closely related, they can yield different rankings in measuring performance. In general, productivity is the most commonly used measure, be it measured in terms of total factor productivity (TFP) or in partial terms such as labour productivity (output per labour) and yield (output per hectare) for its relative ease in calculation and interpretation.

In the following sections, changes over time in output and productivity growth in different regions are compared and the causes for variations are discussed.

Agricultural Development and Input Use

Agricultural output and productivity vary greatly with the stage of economic development, resource endowments, government policy and agronomic-ecological conditions. However, there is a similar path in agricultural development over time and across countries. Pingali and Heisey (1996) categorized the technological transformation of cereal crop production system into three distinct phases:

1. the land-augmentation phase;
2. the labour-substitution phase; and
3. the knowledge- and management-intensity phase.

The basic assumption is that the transition from one phase to another is determined by growing factor scarcity, first for land, then for labour and finally for other factors of production, such as machinery and management skills.

The first phase is characterized by area expansion being the main source of output growth, as was seen during the pre-Green Revolution era of the 1950s and 1960s. However, as opportunities for area expansion decline over time, cropping intensity is increased, along with increasing use of water, fertilizers, pesticides and high yielding varieties. This was indeed the case during the Green-Revolution period in the 1970s and early 1980s. Such intensive production results in an increased demand for labour and mechanization, as the production system moves from single-cropping to double- and triple-cropping with increased application of purchased inputs.

Eventually, production reaches the point of diminishing marginal returns to further intensification, as was the case in the late 1980s, the post-Green Revolution phase. Here, better technical knowledge and management skills are used to substitute for traditional inputs. Variety selection, fertilizer timing and placement, water management and pesticide application are some areas in which productivity has improved with reduction in unit cost of production.

The model just outlined is used in the following analysis as the basic framework to explain the changes in input use and in productivity between the 1960s and the 1990s. First, it is applied to various regions in the world, then to the developing and developed countries, and finally to the selected countries in Asia and the Pacific.

Comparisons of Agricultural Output and Input Use by Regions

Agricultural output along with usage rates for conventional inputs, including land, labour, tractor and fertilizer, in various regions are presented in Table 5.1. It can be seen that in 1994, Asia produced 47 percent of the world's agricultural output and had most of the agricultural (40 percent) and irrigated land (70 percent) and highest total fertilizer use (47 percent). Only in terms of total tractor use does it rank second, following Europe. In terms of input use per hectare, Asia ranks third for both fertilizer and tractors, following Europe and North America.

Notably, output in Asia tripled between 1961 and 1994. This three-fold increase can be attributed to the increase in input use (an 81 percent increase in irrigated land, a 13-fold increase in fertilizer usage, and a 27-fold increase in tractor usage). However, there was only a slight increase (eight percent) in the amount of land used. In terms of factor productivity in Asia, it appears that fertilizer productivity declined by 80 percent from 1961 to 1994 while land productivity increased by 184 percent. Because of the interaction between inputs used, these results should be interpreted with caution. Overall, the information presented in Table 5.1 suggests that although fertilizer usage in Asia is approaching the levels used in Europe and North America, land productivity can be improved further by increasing the degree of mechanization.

TABLE 5.1
Agricultural Output, Input Use and Productivity by Regions, 1961 and 1994

Input Use, 1961 and 1994
	Africa	Asia	Europe	Latin America	North America
1961
Net ag output (89-91 thousand million US$)	36.68	161.42	123.37	50.79	84.59
Land (million hectares)	155.12	436.21	151.37	102.27	225.71
Irrigated land (million hectares)	7.36	90.17	8.32	8.13	14.35
Percent of land irrigated	4.75	20.67	5.50	7.95	6.36
Tractors (million)	0.26	0.26	5.38	0.46	6.42
Fertilizer (million tonnes)	0.73	3.89	14.29	1.06	14.09
Fertilizer per hectare (kg)	4.68	8.92	94.43	10.33	62.45
Tractor per 1 000 ha (number)	1.65	0.60	35.53	4.53	28.45
1994
Net ag output (89-91 thousand million US$)	78.81	496.74	186.14	122.42	162.68
Land (million hectares)	190.02	472.56	135.43	156.01	233.28
Irrigated land (million hectares)	12.20	163.17	16.77	17.65	22.11
Percent of land irrigated	6.42	34.53	12.38	11.32	9.48
Tractors (million)	0.59	7.87	12.35	1.67	6.36
Fertilizer (million tonnes)	3.47	61.08	21.98	9.23	32.86
Fertilizer per hectare (kg)	18.26	129.26	162.34	59.17	140.86
Tractor per 1 000 ha (number)	3.12	16.66	91.19	10.73	27.25
Factor Productivity, 1961 and 1994
	Africa	Asia	Europe	Latin America	North America
1961
Net output/fertilizer(US$1 000/mt)	50.48	41.47	8.63	48.08	6.00
Net output/HA (US$/ha)	236.49	370.06	815.04	496.66	374.79
1994
Net output/fertilizer(US$1 000/mt)	22.71	8.13	8.47	13.26	4.95
Net output/HA (US$/ha)	414.72	1,051.18	1,374.48	784.70	697.37

Source: FAO (1997b).

Comparisons of Agricultural Output and Input Use, Developing Versus Developed Countries

In this section, comparisons were made for trends in land use, production and yield between developing and developed countries and across four commodities (rice, wheat, maize and other grains) for the period 1967-1994. The data were split into two subperiods, which coincided with the peak-green revolution period (1967-1982) and the post-green revolution period (1982-1994). The results are summarized in Table 5.2.

Several points can be drawn from Table 5.2. First, there are substantial variations in growth rates across all commodities, between developing and developed countries, and over time between the two subperiods. Secondly, the growth rates of cereal production and yield show a significant slowdown nearly across the board in the second subperiod. Thirdly, the crop area has been declining, again with only a few exceptions. Finally, the growth rates in yield between 1993 and 2020 are projected to be lower than what they were previously, with the exception of "other grains." Those exceptional cases are highlighted with asterisks in Table 5.2.

TABLE 5.2
Annual Growth Rates of Crop Area, Production and Yield 1967-1994 (percent)

	Area		Production			Yield
	1967-1982	1982-1994	1967-1982	1982-1994	1967-1982	1982-1994	1993-2020p
Wheat
Developed	-0.12	-1.38	1.73	-0.03	1.87	1.35	1.06
Developing	1.45	0.42	5.39	2.94	3.88	2.52	1.30
World	0.48	-0.59	2.88	1.20	2.40	1.80	1.17
Maize
Developed	0.64	-0.26	3.05	0.69	2.33	1.01	0.84
Developing	0.65	1.36*	3.46	3.66*	2.80	2.27	1.36
World	0.64	0.77*	3.20	1.93	2.52	1.16	1.03
Paddy Rice
Developed	-0.23	-0.28	-0.14	0.34*	0.09	0.61*	0.53
Developing	0.81	0.21	3.21	2.03	2.38	1.81	1.08
World	0.78	0.20	2.96	1.94	2.17	1.74	1.05
Other Grains
Developed	0.52	-1.63	1.32	-0.78	0.79	0.85*	0.78
Developing	-0.87	0.12	1.20	0.03	2.08	-0.09	1.24
World	-0.15	-0.79	1.28	-0.52	1.43	0.26	0.85

Source: Rosegrant and Ringler (1997).
p indicates projected, not observed, figures.
* indicates increases in growth rates between 1967-82 and 1982-94.

According to Rosegrant and Ringler (1997), the reduction in land area and production of wheat and other grains in developed countries was primarily policy-induced. It reflects the changes in price support programmes in North America and the Common Agricultural Policy in the European Union, as well as economic and political reforms in the formally centrally planned economies of Eastern Europe and the former Soviet Union. On the other hand, the slowdown of cereal productivity growth in developing countries, particularly in Asia, since the 1980s, was attributed to declining world prices and over-intensification of cereal production. Specifically, declining cereal prices had caused a shift of land out of cereals and into more profitable cropping alternatives, such as horticultural products. Furthermore, the intensity of land use in the late 1960s and 1970s ,when the Green Revolution was in full swing, led to input usage beyond the optimal levels, reducing yield in the later period.

From these observations, it seems apparent that land area available for cropping is unlikely to increase and may fall even further as more agricultural land is diverted to residential and industrial uses. A decrease in cropping area means that a greater burden will be placed on growth in crop yield to meet future cereal demand. Moreover, it appears that over-intensification may have led to resource degradation and hence a slowdown in yield growth. The implication is that, to maintain or increase yield in the future, more emphasis on sustainable agriculture is essential.

The Asian-Pacific Countries

The data presented here focus on seven Asian-Pacific countries and, where appropriate, use the United States as a benchmark. Moreover, comparisons are made based on agriculture as a whole rather than by commodity. The countries included are Australia, the United States, China, India, Indonesia, Japan, and South Korea.

Trends in input use, in terms of arable land and labour, and final agricultural output are presented in Table 5.3. The growth rates in labour use are variable. While there tended to be negative or little growth in labour input use in the United States, Japan, Australia and South Korea, there was slight to moderate growth in China, India and Indonesia. In terms of arable land use, the overall picture displayed little to negative growth. In addition, the negative growth was quite substantial in Indonesia and South Korea during 1987-94. The latter result could be attributable to fast industrialization in these two countries.

TABLE 5.3
Annual Average Growth Rates of Labour, Land Use and Agricultural Output (percent)

	USA	Japan	Australia	China	Indonesia	India	South Korea
Labour
1961-1975	-3.27	-3.66	-0.39	3.39	0.51	2.22	0.79
1975-1987	-2.48	-2.53	0.22	0.59	1.60	1.50	-3.40
1987-1994	0.86	-7.29	-1.10	0.98	2.08	2.55	-4.54
Arable Land
1961-1975	0.23	-1.55	2.43	-0.39	0.00	0.36	0.10
1975-1987	-0.03	-0.53	0.89	-0.38	1.36	0.11	-0.22
1987-1994	0.00	-0.64	0.02	-0.23	-2.98	0.00	-1.17
Final Agricultural Output
1961-1975	2.26	2.42	3.61	4.09	2.91	2.42	4.65
1975-1987	1.00	0.86	0.93	4.99	4.42	2.58	3.10
1987-1994	2.71	-0.42	1.73	5.15	3.38	4.64	2.29

Source: Rao and Lee (1997); FAO (1997b).

Agricultural output growth has remained positive from 1961 to 1994 (Table 5.3), with only one exception (Japan). Comparisons of growth rates are more variable, however. For example, during 1975-87, the developed economies (United States, Japan and Australia) experienced a slowdown in production while production in less developed economies (China, India, South Korea and Indonesia) accelerated (Table 5.3).

The slowdown during the period 1975-1987 coincides with the growth deceleration in OECD countries during 1973-1987 in response to the oil shocks and resulting changes in macroeconomic policies (Maddison, 1989). Maddison claims that Asian countries did not suffer as much from the oil price increases because of generally more flexible commodity and labour markets and less institutional rigidity that magnify external price shocks compared to OECD countries. Another reason for strong growth in Asian countries was because of high levels of investment and rising educational levels during that period.

After the recession, during 1987-1994, Japan continued its slide to register a negative output growth (-0.42 percent), the United States showed a strong recovery and Australia recovered but only to half the rate it was before the slowdown. In comparison, China and India had shown strong output growth throughout the observation period. Also, it can be seen from Table 5.3 that, although during 1987-1994 the output growth rate was negative (-0.42 percent) in Japan, labour productivity grew by an impressive 7.41 percent, the highest among the countries listed. The increase in productivity stemmed from the fact that the reduction in output was more than offset by the savings in labour use. In China, output grew at a rate of 4.09 percent per year during 1961-1975 while labour productivity grew only marginally at a rate of 0.68 percent. The differing rates imply that increases in output may have been due to greater use of labour rather than from productivity increases. In contrast, output growth in Japan comes mainly from productivity growth.

Table 5.4 shows the growth rates for partial factor productivity in terms of land and labour. It should be noted that both China and India showed strong growth in output between 1961 and 1994 (4.09 to 5.15 percent per annum for China and 2.42 to 4.64 percent for India, Table 5.3) but the results for productivity growth were somewhat different. In particular, China registered a dramatic increase in labour productivity from 0.68 percent per annum in 1961-1975 to 4.37 percent in 1975-1987 and 4.13 percent in 1987-1994; the comparable figures for India were 0.20, 1.07 and 2.04 percent. In general, output growth in both countries was due to the increased use of water and purchased inputs such as high yielding varieties and fertilizers (Wong, 1989).

TABLE 5.4
Annual Average Growth Rates in Labour and Land Productivity (percent)
(1987 Geary-Khamis Prices with Shadow Prices)

	USA	Japan	Australia	China	Indonesia	India	South Korea
Labour Productivity
1961-1975	5.72	6.32	4.02	0.68	2.39	0.20	3.83
1975-1987	3.57	3.48	0.72	4.37	2.77	1.07	6.74
1987-1994	1.84	7.41	2.87	4.13	1.28	2.04	7.16
Land Productivity
1961-1975	2.03	4.03	1.16	4.51	2.91	2.05	4.54
1975-1987	1.03	1.40	0.05	5.39	3.02	2.47	3.33
1987-1994	2.71	0.22	1.71	5.39	6.56	4.65	3.51

Source: Rao and Lee (1997); FAO (1997b).

South Korea and Japan both encountered a slowdown in output growth between 1961-1975 and 1987-1994, but labour productivity grew at impressive rates of 7.41 percent in Japan and 7.16 percent in South Korea during 1987-1994. Despite their high levels of labour productivity, Australia and the United States both encountered a slowdown during the period 1975-1987 in output and labour productivity growth. Although labour productivity picked up again during the period 1987-1994 for Australia, the United States continued its decline.

Growth rates of land productivity, presented in Table 5.4, show that in general less developed countries experienced higher growth than developed countries. Japan from 1961 to 1975 is an exception. This could be the result of land intensification where input-intensive multiple cropping was a common practice to compensate for the scarcity of cultivated land. The national index of multiple cropping in China was 1.31 in 1952, 1.5 in 1978 and 1.58 in 1996 (Lin, 1998). In comparison, the index in India was 1.18 in 1970 and 1.24 in 1980 (Wong, 1989). These figures may explain some of the growth in land productivity in these two countries. Wong (1989) also claims that land reforms in China from collectivization to private ownership had a larger impact on land productivity than in India where land reform changed the land tenure system but not ownership.

Despite strong growth in output and partial factor productivity of labour and land, total factor productivity growth has been found to be negative for China (Tang, 1984; Wen, 1993; Wong, 1989) and India (Wong, 1989). These results indicate clearly that output growth was generated primarily from the expansion of inputs, rather than productivity increases.

Table 5.5 shows the relative labour productivity and yields in the selected Asian-Pacific countries using the 1961 figures for the United States as a benchmark. First, it can be seen that most countries have become more productive over time. Secondly, there are wide disparities among countries with three possible divisions. The first group includes the United States and Australia; the second, Japan and South Korea; and the third, China, Indonesia and India. For example, in 1961, agricultural labour in the United States was two-thirds as productive as that in Australia, nearly 15 to 25 times as productive as that in Japan and South Korea and more than 30 to 40 to times as productive as that in China, Indonesia and India. In 1994, the agricultural labour force in the United States was equally productive as that of Australia, 10 to 20 times as productive as Japanese and Korean agricultural labour and 60 to 80 times as productive as Chinese, Indonesian and Indian agricultural labour. The differences in mechanization and labour quality may explain the differences in the level of and changes in productivity in these countries.

TABLE 5.5
Indices of Agricultural Labour and Land Productivity in Selected Countries (USA 1961 = 100)

	USA	Japan	Australia	China	Indonesia	India	South Korea
Labour Productivity
1961	100.0	6.1	149.2	2.3	2.9	3.4	3.6
1975	217.9	14.3	258.9	2.5	4.0	3.5	6.2
1978	252.3	15.1	334.4	2.8	4.3	4.0	8.1
1987		21.6	282.1	4.2	5.5	3.9	13.5
1994	377.3	35.7	343.8	5.6	6.0	4.5	21.8
Land Productivity
1961	100.0	415.9	51.9	06.1	106.0	63.6	227.0
1975	132.5	723.5	60.9	196.7	158.3	84.6	422.8
1978	138.1	751.5	74.4	218.4	174.5	93.3	525.6
1987	149.9	855.2	61.3	369.4	226.3	113.3	626.4
1994	180.8	868.4	69.0	533.3	352.8	155.7	797.3

Source: Rao and Lee (1997); FAO (1997b).

The comparative performance in terms of land productivity (or yield) of arable land shows a different picture (Table 5.5). In this case, Japan and South Korea have the highest yields, followed by China, then by Indonesia, the United States, India and Australia. These results indicate that countries with limited land resources tend to farm their lands more intensively and hence have higher output per unit of arable land. They also reflect differences in climate and water availability.

In summary, it appears that there are substantial variations in input use and productivity among countries and over time. The only trend that is common to the countries examined is perhaps the negative growth in arable land use. Secondly, there are substantial variations in the level of productivity and the rate of productivity growth among developing countries (China, India, and Indonesia), newly industrialized countries (Japan and South Korea) and developed countries (Australia and the United States).

This suggests that there is ample room for productivity improvements in the less developed countries. Meanwhile, the gaps in productivity, as presented in Table 5.5, are closing. Furthermore, the fact that growth in output and various measures of productivity can sometimes move in opposite directions confirms the important distinctions between output growth and productivity growth, and between total and partial factor productivity.

Finally, it is apparent that the slowing or negative growth in global crop area will increasingly place the burden of meeting future cereal demand on productivity improvements. Productivity improvement can come either from using existing inputs more efficiently (moving closer to the production frontier) or from technological change (shifting the production frontier upward), or a combination of both. It has been shown that, with existing technology, efficiency is primarily influenced by human capital, such as farmers' education and experience, access to credit and extension services (Coelli and Battese, 1996). Technological change depends, on the other hand, on investments in agricultural research and extension (Alston, Norton and Pardey, 1995; Antle and Capalbo, 1988; Pray and Evenson, 1991). In the next section, sources of productivity growth are discussed based on a survey of existing literature.

5.3 Factors Affecting Productivity Growth

In explaining productivity growth, economists originally limited themselves to the role of conventional inputs such as land, labour, physical capital, water and chemical inputs. However, the failure to explain productivity growth adequately led them to examine the role of human capital and public goods, such as education, agricultural research and extension and publicly provided infrastructure (Griliches, 1963; Mankiw, Romer and Weil, 1992; Nelson, 1964 and 1981; Solow, 1957). Public policies that have a strong link to agricultural productivity such as policy reforms were also examined (Auraujo, Chambas and Foirry, 1997; Lachaal, 1994; Lin, 1992; McMillan, Whalley and Zhu, 1989; Wiens, 1983).

The rationale for considering research is the belief that investments in research result in increases in the stock of knowledge, which, in turn, either facilitate the use of existing knowledge or generate new technology. Technological advances, whether resulting from changes in input quality or how inputs are combined, lead to productivity gains. Education, training and extension also increase productivity by increasing people's knowledge and skill base, which are essential for technology adoption and efficient use of inputs. Public infrastructure, on the other hand, increases productivity by facilitating the exchange of goods and services.

Technological Change

Technological change is recognized by many as one of the most important sources of productivity growth (Antle and Capalbo, 1988). It refers to the changes in the production process that come about from the application of innovation and newly acquired scientific knowledge and technical and management skills. Technological change increases agricultural productivity either by shifting the production frontier upward so that more measured output can be produced with the same amount of inputs or by moving closer to the production frontier so that the same amount of output can be produced with a smaller amount of inputs. Better organizational and management skills not only improve input-output combinations but enable producers to respond more quickly to changing market circumstances (Alston, Norton and Pardey, 1995).

While generation of new technology or knowledge comes from investments in research and development, adoption of technology involves investments by the potential users in both physical and human capital (Antle and Capalbo, 1988). Therefore, adoption of technology depends principally on their applicability and expected returns of the innovation. However, there may be a long lag between development, adoption and productivity gains. Chavas and Cox (1992) found the lag to be up to 15 years between making an investment in research and having an effect on productivity. However, after taking effect, the benefits from an innovation may persist for thirty years or more.

The lag between generation of new technology and its widespread adoption by farmers has important policy implications. First, the adverse effects of reduced public funding to agricultural research and extension on productivity may be under-estimated if the lagged effects are not accounted for. Secondly, the complementarity between research and extension should be taken into account. The former helps the development of new technology, while the latter helps speed up the rate of diffusion and adoption of new technology. Extension can be done more effectively by identifying factors that contribute to technology adoption. As an example, innovators in a farming community can be identified and targeted for extension services.

Since better-educated farmers are found to be more likely to adopt new technology, human capital is a pre-condition for technology adoption and hence productivity growth. Further, if adoption of new technology requires additional investments, lack of access to credit and additional inputs may prevent or slow down technology adoption. Finally, because potential users of new technology often differ in the agronomic-ecological conditions in which they operate, new technology may require adaptive research before it can be transferred successfully to different locations. These impediments to technology adoption mean careful planning and provision of necessary infrastructure are essential to capture the full benefits of new technology.

Agricultural Research and Extension

Many researchers have explored the roles of research and extension in promoting agricultural growth. Rosegrant and Evenson (1992) found that in South Asia, public research accounted for 30 percent of the output growth, and extension for about 25 percent, with corresponding rates of return being 63 percent and 52 percent, respectively. Pray and Evenson's (1991) survey of Asia found the rates of return to national research investment ranged from 19 to 218 percent, returns to national extension investment from 15 to 215 percent, and returns to international research investment from 68 to 108 percent.

Evenson and McKinsey (1991) found that public investment in research accounted for over half of the output growth in India and extension contributed about one-third. The calculated internal rates of return were 218 percent for public research and 177 percent for extension. However, they found that little output growth was attributable to infrastructure. Jamison and Lau (1982) also found that physical capital had little impact on production or profits, as compared to farmer's education and extension services.

Fan (1996) found that public research expenditures accounted for about 20 percent of total production growth in Chinese agriculture during the period 1965 to 1994. The annual rates of return to agricultural research investment in China ranged from 44 percent to 83 percent. Fan (1996) concluded that the rapid growth in agricultural output in China during the 1980s and 1990s was the result of public investments in R&D as well as the institutional and market reforms that began in 1979. He concluded that increases in agricultural research were justifiable; not only did they stimulate additional output growth, but the rate of return to agricultural research was much higher than commercial interest rates.

Despite the high rates of returns from public research investments, agricultural research intensity (ARI), measured as a percentage of Chinese agricultural GDP, was found to have declined from 0.56 percent for the period 1958-1965 to 0.43, 0.44, 0.39 and 0.40 percent, respectively, for 1966-1976, 1977-1985, 1986-1990 and 1991-1993 (Fan, 1996). Lin (1998) reported that, as part of the overall market reform, the Chinese Government had reduced its fiscal appropriation for agricultural research, shifting funding from institutional supports to competitive grants and cost recovery. As such, it can be expected that an increasing proportion of research activities will move from the public to the private domain.

Other studies on output growth have also shown a high payoff from agricultural research and extension (Table 5.6). The results indicate that the rate of return on research, in most cases, ranged from 15 to 50 percent for both developed and developing countries, but some estimates were as high as 218 percent. The wide disparity among the estimates raises questions regarding the sensitivity of these estimates to the commodity of interest and the use of different time periods and methodologies. Estimates for Asian countries appear to be higher and show a much wider variation than those of studies in the United States. This could be due to the diverse nature of Asian agriculture, which differs from country to country in economic, social and agronomic-ecological conditions. Because of inconsistency in the data and methodology used, it is not possible to make direct comparisons across countries or over time. Nevertheless, the general conclusion that R&D yields relatively high returns seems indisputable.

TABLE 5.6
Internal Rate of Return to Public and Private Investments to Raise Agricultural Productivity

	Time period	Country studied	Public R&D (percent)	Private R&D (percent)	Extension (percent)
Makki, Tweeten and Thraen (1996)	1930-1990	USA	27	6	--
Huffman and Evenson (1993)	1950-1982	USA	41	46	--
Chavas and Cox (1992)	1950-1982	USA	28	17	--
Davis (1981)	1964-1974	USA	28-52	--	--
Griliches (1963)	1949-1959	USA	30-50	--	--
Mullen and Cox (1995)	1953-1988	Australia	15-40	--	--
Mullen and Strappazzon (1996)	1953-1994	Australia	18-39	--	--
Thirtle (1996)	1954-1992	UK	15-20	--	--
Maredia and Byerlee (1996)	1965-1990	37 LDCs	5-34	--	--
Rosegrant and Evenson (1992)	Various	S. Asia	63	--	52
Pray and Evenson (1991)	Various	Asia	19-218	--	15-215
Fan (1996)	1975-1994	China	44-83	--	--
Salmon (1991)	1965-1977	Indonesia	151	--	--
Evenson and McKinsey (1991)	1966-1986	India	218	95	--

Source: Adapted from Makki, Tweeten and Thraen (1996).

Human Capital

Human capital refers to knowledge, experience and skills possessed by people involved in the production process. It is influenced directly by education, training and extension. Its importance lies in the fact that it has a significant impact on the adoption and the utilization of technology, which in turn, affect the allocation of resources and productivity. A well-trained and well-educated labour force is said to be in a better position to assess changing conditions and make necessary adjustments. This ability is becoming ever more important in an increasingly deregulated and global economy where changes in the commodity markets are frequent and quick responses are required.

The concept of investment in human capital covers not only investments in formal schooling and post-school and on-the-job training, but also investment in the form of improved health and family care. Social capital, on the other hand, refers to one's ability to utilize social networks and institutions. Social status, education and the range of social institutions available can influence one's social capital. Social capital is important in that it affects access to physical capital, land title, credit and cooperatives, all of which have implications for resource allocation and, hence, productivity.

Women appear to suffer most severely from having limited access to human and social capital in some developing countries, although a larger proportion of women than men are engaged in agriculture (Quisumbing et al., 1995). For example, women account for 70 to 80 percent of household food production in sub-Saharan Africa, 65 percent in Asia, and 45 percent in Latin America and the Caribbean. As such, it has been suggested that empowerment of women and gender equality are important factors for raising productivity and promoting food security in developing countries. Jahnke, Kirschke and Lagemann (1987) also found that low adoption of high yield varieties (HYV) in Africa is attributable to lack of appropriate technology development and few extension services directed to women. These findings suggest that acknowledging the critical role of rural women in Asia and providing them with greater access to resources and human capital are crucial in promoting sustainable agriculture and food security.

Policy Reform and Prices

The importance of policy reform is increasingly viewed as fundamental for agricultural productivity gains, especially for countries where government intervention in agriculture has been strong. Removing market distortions and allowing market signals to be transmitted to producers is the main objective of structural adjustment programmes by international organizations for economies in transition and countries in debt. Land reform and most land policies, which assign property rights to users so that efficient and responsible use of resources can take place, are other cases where changes in policy can have a significant impact on productivity.

A good example of policy reform is the implementation of China's responsibility system (RS) in the late 1970s, which linked productivity with material rewards. The policy reform was found to have resulted in increased incentives to produce and hence there were increases in crop yields for every major crop (Wiens, 1983). McMillan, Whalley and Zhu (1989) also reported that in response to the RS and price reforms, output in the Chinese agricultural sector increased by over 61 percent and productivity by 32 percent between 1978 and 1984. Moreover, 78 percent of the output growth was attributed to the RS and 22 percent to higher prices for crops. Lin (1992) also found that 47 percent of the growth in agricultural output was attributable to the RS during the same period.

However, Lin (1992) acknowledged that benefits from the RS reform had disappeared by 1984-1987. Similar results were found by Huang, Rosegrant and Rozelle (1996), who indicated that the growth rate of rice production was much higher during the reform period (4.5 percent) than afterwards, during 1984-1992 (1.3 percent). Moreover, while the reform was the most significant source of output growth during the reform period, technology was the most significant source of growth later during 1984-1992. Based on these results, Kalirajan, Obwona and Zhao (1996) concluded that despite the substantial impacts of policy reform on output and productivity growth, they provide only a one-shot boost to agricultural productivity. As such, long-term productivity gains depend more on technical change, investments in agricultural research and human capital and, to a lesser extent, on infrastructure.

By contrast, some government policies have been found to have detrimental effects on productivity. Lachaal (1994) found that direct input subsidies to agriculture reduce productivity growth and were a source of technical inefficiency. In this case, the subsidies encouraged using subsidized materials at the expense of other inputs. It was found that with each 10 percent increase in subsidy, the cost of production increased by 1.8 percent. Similarly, Makki, Tweeten and Thraen (1996) found that government commodity programmes had had little effect on improving agricultural productivity in the United States. They concluded that the interest of United States' agriculture in international competitiveness and low food costs would be better served by focusing on research, extension and education than by commodity programmes. They also cautioned that the debate to reduce public spending on agricultural research and extension should carefully consider the potential long-term implications of such a policy.

International Trade

Facilitated by improvements in transportation and communication technology, trade has also been important in diffusing new products and new technologies. It is also clear that opening of economies is strongly associated with rapid economic growth. A case in point is the rapid post-war growth of the most dynamic Asian countries, such as Japan, South Korea and Taiwan, and the low growth of inward-looking economies such as China (before the open-door policy) and India. Statistics have shown that during 1950-1973, the annual average compound growth rate in export volume were relatively high in Japan, South Korea and Taiwan as compared to China, Indonesia and India (Table 5.7). During 1973-1986, export growth declined relative to the previous period in Japan, South Korea, Taiwan and Indonesia, was unchanged in India, and climbed dramatically in China.

TABLE 5.7
Average Compound Growth Rate
in Export Volume (percent)

	1950-1973	1973-1986
Japan	15.4	7.6
South Korea	20.3	14.0
Taiwan	16.3	11.6
China	2.7	10.4
Indonesia	6.5	3.3
India	2.5	2.5

Source: Maddison (1989).

However, the opening of an economy does not come without risks, particularly where macro-economic, financial and lending policies are not well in place. The recent Asian financial crises underscore how weak financial policies can undermine much of the gains from trade.

Natural Resources

Natural resources are critical determinants of food supply. Degradation of natural resources, such as land and water, undermines production capacity and threatens the sustainability of the natural ecosystem (Pinstrup-Andersen and Pandya-Lorch, 1998). Land degradation has been severe in the past few decades. It was found that since 1945, about two thousand million of the world's 8.7 thousand million hectares of agricultural land, permanent pastures, forest and woodland have been degraded through inappropriate agricultural practices, overgrazing and deforestation (Oldeman, 1992).

One major contributing factor to land degradation is the overuse and misuse of irrigation water (Anderson, 1994). Asia contains the majority of the world's irrigated land. Water for irrigation is essentially free, however. Research into various water allocation mechanisms such as attempts to structure economic incentives for water use must be undertaken. To a large extent, these problems can be alleviated by assigning property rights. Poverty reduction as well as government policies to provide access to markets and credit for land improvements and technology would also reduce misuse of water resources. Therefore, agricultural research is a critical input into sustainable agricultural development, particularly as related to land and water management issues.

5.4 The Role of Investment

Investments in agricultural research and development (R&D) from both the public and private sectors can lead to technology generation and productivity improvements. The impact of investment on agricultural research can be seen most clearly from Rosegrant, Agcaoili-Sombilla, and Perez (1995). In their global food projections to 2020, they assumed a baseline scenario of US$10 thousand million public investment in national agricultural research and extension services. The low-investment scenario, which assumed an annual cut of US$1.5 billion to the current level of public investment, resulted in a fall of 15 percent in crop and livestock yield growth rates by 2020. In contrast, if funding of national and international research were to rise by US$750 million per year, crop yield growth would be six percent higher in 2020 than under the baseline scenario. Although these figures are projections and their accuracy is subject to underlying assumptions, they indicate strongly the negative effects of reduced public investment in research and extension, and the crucial role of investment in increasing agricultural productivity.

Private Versus Public Investments

Table 5.6 indicated that the rate of return is, in most cases, greater from public research than private research (Chavas and Cox, 1992; Evenson and McKinsey, 1991; Huffman and Evenson, 1993; Makki, Tweeten, Thraen, 1996). The higher rate of return from public research is, in part, attributed to economies of scale in the production of new agricultural technology and the spill-over and externalities associated with such research (Schultz, 1964). One example of such externalities is the international flow of germplasm. In this case, research benefits from breeding programmes of one country or research institute are appropriated by users who do not incur the full research costs. Public funding is therefore justified by the public nature of knowledge and the high rates of return to public investments in agricultural research.

Traditionally, most agricultural research is publicly funded. However, in recent years, the costs of agricultural technology generation and transfer are shared increasingly with the private sector, particularly in more advanced countries (FAO, 1996b). The proportion of privately funded research is on the order of 30 to 40 percent of all research expenditures in developed countries (nearly two-thirds in the United States) and about five percent in the less-developed countries (FAO, 1996b). This increase in private research has to do with protection of markets for research results via patents and intellectual property rights (IPR) as well as recent changes in funding policies (Alston, Norton and Pardey, 1995; Lin, 1998).

Private research is attracted to sectors of the market where research results exist and benefits can be privately appropriated (Alston, Norton and Pardey, 1995). This is typically the case in more developed countries where intellectual property rights are well established and protected for inputs such as agrichemicals, agricultural machinery and seeds (FAO, 1996b). Private investments also include on-farm irrigation systems, land improvements, new tractors and combines, livestock breeds and plant varieties, as well as processing, transport and storage facilities for post-production marketing.

Government, therefore, can provide an environment conducive to investment, through guarantee of rights and law as well as policies encouraging investment, as recognized in the World Food Summit Plan of Action items 2 and 3 (FAO, 1996a). In addition, investments in basic infrastructure, human capital, basic research and resource management will still fall more upon the public sector because of the public goods nature of these investments.

5.5 Conclusions and Implications

Concerns over food security are driven by the need to feed an increasing population and to protect the environment. One means of addressing these concerns is to increase the food supply locally by improving agricultural productivity. Although productivity varies across commodities and countries according to stage of economic development, government policy and agronomic-ecological conditions, long-term growth in agricultural productivity depends primarily on technological change, improved input use efficiency and conserving the resource base. All of which, in turn, depend crucially upon investments in agricultural research, extension, and human capital.

From the literature survey, some conclusions can be drawn about the driving forces behind agricultural productivity growth in the Asia-Pacific region. Potential growth due to expansion of land under cultivation or increased input use, with the exception of machinery, is limited. This points to technological progress as the key to growth, driven by agricultural research and extension and improvements in human capital. Policy reforms, on the other hand, while extremely important, may provide only a one-shot boost to agricultural productivity, unlike agricultural research and extension from which the contribution to productivity is long lasting.

Agricultural research intensity ratios are found to be relatively low for developing countries in the Asian-Pacific (Table 5.8), as compared to the two percent target suggested by Pardey and Alston (1995) and Pinstrup-Anderson, Lundberg and Garrett (1995). Further, public funding of agricultural research and extension has been reduced both nationally and internationally (Anderson and Purcell, 1996).

TABLE 5.8
Agricultural Research Intensity Ratios
(Agricultural Research Expenditures/Value of Agricultural Production)

Region/Country	Number of countries	1961-1965	1971-1975	1981-1985	Latest Year
Developing Regions	NA	NA	NA	NA	NA
Sub-Saharan Africa, excluding South Africa	17	0.42	0.67	0.76	0.58a
South Africa	1	1.39	1.53	2.02	2.59a
Asia and the Pacific, excluding China	15	0.14	0.22	0.32	NA
China	1	0.57	0.44	0.42	0.42b
Latin America and the Caribbean	26	0.30	0.46	0.58	NA
West Asia and North Africa	13	0.28	0.50	0.52	NA
Developed countries	18	0.96	1.41	2.03	NA
United States	1	1.32	1.36	1.93	2.22c
Australia	1	1.54	3.56	4.52	4.42d

Source: Pardey and Alston (1995).
^a 1991 estimate; ^b 1993; ^c 1992; and ^d 1988.

With declining public funding and institutional changes for research, one way to keep up with the growing needs for information and technology is to raise the productivity of public research. Research productivity can be increased with closer collaboration between agricultural research systems by exploiting research synergies and avoiding duplications (Jahnke, Kirschke and Lagemann, 1987). Further, the feedback between scientists and users is essential for generating the right technology and fully capturing the benefits of its utilization (FAO, 1996b). Finally, existing wide disparities in yields among countries in the same region and between continents suggest that considerable improvements in agricultural productivity could be achieved by transferring technology more effectively and efficiently from research centres to potential users and from existing users to new users.

The funding problems facing public research in developing countries also mean that the private sector will play an increasingly important role in applied and adaptive research. This implies that the role of government is to focus investment on basic research, human capital and infrastructure and to provide an environment and incentives, such as property rights, market reforms, more open policies and a stable economy, conducive to private investment.

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