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Addressing long-run food insecurity: Agricultural growth, demand response and Rural development

Production and supply response
Consumption and demand response
Off-farm response and rural development

While rapid urbanization in recent years has somewhat diminished the contribution of rural areas to national poverty, the main source of poverty in virtually all developing Asian countries remains the rural sector. Nearly three-fourths of the poor in these countries have their origin from rural areas (Quibria 1993; Lipton and Ravallion 1995). The large majority depend on agriculture for employment and income. The landless farm workers account for about 40% of rural poverty in Bangladesh, 45% in India, and 15% in the Philippines. The rest are mainly small owner cultivators and tenants. Since food insecurity is largely a failure of food entitlements arising from low returns to assets owned by the poor, the bulk of the food insecure are also largely the rural poor. For this reason, agricultural and rural development is seen as central to a strategy aimed at alleviating poverty and food insecurity, apart from serving to fuel industrialization in developing countries (Adelman 1984, Mellor 1995, Johnson 1997). Indeed, the past three decades of agricultural growth - of which growth in the food sub-sector, particularly cereals, was an important component - in developing Asian countries demonstrate a powerful link running from growth to poverty alleviation, at least in countries or areas of a country where initial conditions allow a broad-based distribution of the benefits of growth.

Production and supply response

By international standards, food production growth in Asian economies during the past 20 years was quite remarkable, reflecting in part the rapid economic growth which took place in these economies, particularly East Asian economies. Cereal output per capita grew by 1.7% a year in East Asian developing countries, while the comparable figure for all developing countries was 0.8% a year (Table 1).

Thus, in East Asia, cereal output per capita in the early 1990s was about 38% higher than in the early 1970s. However, in South Asia, the comparable figure was only 12%, slightly lower than the average for all developing countries (16%). Furthermore, the growth in Asia was dominated by the three most populous countries in the region: China, India, and Indonesia. These countries accounted for roughly 60% of the total change in food output per capita during the period.

In Asia, yield growth contributed the bulk (about 80%) of food production increases, particularly in rice and wheat. There are, however, marked differences across countries, partly reflecting differences in factor endowment and policies. Yield improvement in cereal represented over 70 percent of the observed growth in China, Indonesia, Philippines, India, Bangladesh, and Sri Lanka (Bautista 1993; Balisacan 1996). On the other hand, both yield improvement and area expansion contributed about equally to cereal production growth in Pakistan, Nepal, and Thailand. In the case of India and China, as well as Bangladesh and Sri Lanka, yield improvement more than offset the effect of area contraction on cereal output. For many of the developing Asian countries, the end of the land frontier came as early as the 1970s (e.g., mid-1970s in the Philippines and about 1980 in Thailand).

Table 1. Per capita cereal production in Asia, early 1970s to early 1990s



Asian developing Countries

All developing Countries


Developed Countries




East Asia

South Asia

Early 1970s






Early 1980s






Early 1990s






Source: FAO, Report of the Eighth Session of the FAO Regional Commission on Food Security for Asia and the Pacific, APCFS/97/REP, 1997.
Yield increases have come mainly from the adoption of the Green Revolution technology (also referred to as modern technology), mainly in rice and wheat. In rice, the adoption has favoured irrigated areas, as well as rainfed lands with adequate water control, raising production and returns to land in these areas vis-à-vis upland and unfavourable areas. This bias reflects the past focus of the research system toward high-potential, usually irrigated, areas and on technologies with prospects for wide applications (such as fertiliser-responsive, high-yielding rice and wheat varieties). To be sure, the long-term secular decline of fertiliser prices relative to land, combined with massive investments in irrigation made possible by cheap "petro dollars" in the 1970s, induced, from both the demand and supply sides, the development of land-saving biological technologies. These technologies generally yielded high rates of returns (Evenson 1996).

Expansion of cultivable area is no longer a practical option for the mostly-densely populated countries of Asia, especially in South Asia, China, and the Philippines. Raising agricultural surpluses for exports and urban food consumption will then have to come from improved efficiency in production and post-harvest operations. Technology development for irrigated, favourable areas is likely to remain an important element of a strategy for generating these surpluses, especially since yield levels in most of the crops grown in South Asia and Southeast Asia are still fairly low. But given the gravity of poverty and environmental problems in marginal lands, research may also now have to increasingly give importance to rainfed and ecologically fragile areas. In the long run, the solution to marginal areas may require no less than sustained expansion of high-paying employment opportunities in other regions and/or in nonfarm areas. The process may, however, take a long time, especially for the still largely agrarian economies with low base of physical infrastructure and human capital. The interim solution requires raising productivity in agriculture and enhancing indigenous capacity to manage fragile, complex agro-ecosystems.

The effort to raise agricultural productivity should involve reforming incentives in agriculture (and the rest of the economy), allowing markets to function efficiently, and promoting institutional arrangements conducive to long-term growth and rural development. The response of agriculture to incentives, even in poor countries, cannot be underestimated. The claim still often heard in policy discussions that farmers in developing countries do not respond to economic incentives is not supported by empirical evidence. Numerous studies on developing countries, starting with Schultz (1964), now demonstrate that "if farmers showed little response to economic incentives, it was due not so much to their ability to adapt to changing circumstances, but to the constraint they were facing, and that the potential for a significant supply response did exist if the constraints were relaxed" (Schiff and Montenegro 1997: 393).

Box A

Supply Response to Reforms in Indochina

In recent years, each one of the Indochinese countries - Cambodia, Laos, Myanmar, and Vietnam - has embraced wide-ranging reforms in various sectors toward a transformation of the economy from one that is centrally planned to one that is increasingly market-oriented. The overall response of the economy to these reforms has been encouraging, as evidenced by these countries' relatively high GDP growth rates in the first six years of the 1990s (about 6 percent in Cambodia, 7 percent in Laos, and 8 percent in Vietnam).

Nonetheless, for growth to be sustained, reform and investment measures need to be deepened, especially in agriculture and rural areas where the overwhelming majority of the population are located. These have to focus on improving the environment for agricultural productivity growth and for the rest of the rural economy to respond well to the stimulus provided by this growth. Rural supply response is weak owing primarily to: (i) extremely poor state, or virtual absence, of rural transport and communication infrastructure; (ii) low level of irrigation development; (iii) low quality of human capital, especially in Cambodia and Laos; (iv) weak enforcement of property rights and/or lack of tenure security on land; and (iv) lack of peace and order.

The potential for the Indochinese countries to achieve national food security and sustain poverty reduction through agricultural land development is enormous. Cambodia, for example, has only 16 percent of its arable land under irrigation despite the abundance of surface and groundwater resources. Excellent opportunities in alluvial plains exist for the development of cost-effective, short-gestation, small-scale and farmer-controlled irrigation systems.

Not until recently, the dominant theme in policy discussions was that the supply response of aggregate agriculture was weak and that, in getting agriculture moving, the removal of physical and institutional constraints facing farmers was preferable to higher prices. Indeed, this belief - enshrined, for example, in Mellor (1966) and Delgado and Mellor (1984) - constituted one of the fundamental arguments for selecting agricultural and industrial policies that turned the domestic terms-of-trade against agriculture. Recent evidence shows that this belief has weak empirical basis (Binswanger 1989, Schiff and Montenegro 1997). Supply response is high or low, depending on the conditions or constraints specified for the assessment of the response. These conditions include the quality of infrastructure and other public goods, the credibility of reforms, the quality of governance, the macroeconomic environment, and the global environment for agricultural trade, among other factors. The supply response tends to be high, for example, in environments where there is adequate provision of public goods. Put differently, there exists a complementarity between a favourable price policy regime for agriculture and the removal of constraints, rather than a substitution between them.

In recent decades, agricultural policies - export taxes, export quotas, procurement policies of marketing boards - in South Asia, as well as in Indochina, China, and the Philippines, have tended to suppress the prices of agricultural commodities, often to subsidise urban consumption. In some cases, the disincentives on output are offset - either partially or fully - by incentives on inputs, such as subsidies on working capital, production inputs, and technology transfer.

But even more damaging to incentives in agriculture is the indirect effect of trade and exchange-rate policies that most developing countries have relentlessly pursued in support of the import-substituting industrialisation goals. For most of the period following the Second World War, the Southeast Asian countries (especially the Philippines and, to some extent, Thailand and Indonesia), all the South Asian countries (especially India, Pakistan, and Bangladesh), and China maintained a highly overvalued domestic currency through foreign exchange controls and licensing mechanisms. These controls were even more restrictive than what would have been adopted in connection with import substitution. While the importance of these controls somewhat diminished since the late 1980s, overvaluation has persisted for many Asian countries owing to mounting budget deficits. The overvaluation depressed the domestic prices of tradeable goods relative to those of nontradeable goods, thereby distorting incentives and encouraging the movement of resources towards nontradeable or home goods production. Since home goods were a smaller part of agricultural than of nonagricultural production, the overvaluation (prematurely) shifted resources towards nonagricultural production.

The taxation of agriculture by the policy regime has tended to be even more severe for domestic producers of agricultural export commodities than for producers of import-competing agricultural commodities (Schiff and Valdes 1992; Bautista 1993). Even those countries regarded as successful exporters of agricultural products, such as Thailand and Malaysia, have taxed their agricultural producers, although to a lesser degree compared to South Asian countries that pursued a strongly inward-looking policy regime. In the case of staples, the incentive effect of agriculture-specific policies have tended to be positive - highly positive in some cases, such as for rice in Malaysia - although this effect has tended to be more than offset by the negative protection accorded by trade and macroeconomic policies to the sector.

The policy bias against agriculture (and labour-intensive manufacturing exports) affects various groups in the society differently. In the short run, when fixed productive assets cannot be altered or moved, real incomes of rural workers (as well as workers in the urban informal sector) may decline as demand for labour falls along with the negative protection to agriculture and labour-intensive exports. In the long run, resources move away from agriculture and export sectors and new investments into these sectors are discouraged. Since agricultural production is more labour-intensive, less import-dependent, and, for many of the least developed countries of the region, more efficient in earning (or saving) foreign exchange than industrial production (especially of import-competing industrial consumer goods), the premature shift of resources away from agriculture dampens the growth of employment opportunities and output in rural areas. In the Philippines, for example, the strong policy bias against agriculture in the past decade induced rapid rural-urban migration and contributed to the fall of real wages in the urban informal sector (Balisacan 1993).

In China, the engine of agricultural growth since the late 1970s has been mainly the combined effects of research investments and agricultural and institutional reforms, the latter aimed at relaxing government restraints on the behaviour of farm people as well as permitting markets to develop and grow in significance. The agriculture sector grew by an unprecedented annual average of 7.7 percent during the early period of reforms (1978-1984) and by 4.1 percent during the latter phase (Lin, 1992). In contrast the growth preceding the rural reform period (1952-1978) was an average of only 2.9 percent. In Southern China, research investments and institutional reforms, specifically the introduction of the "household responsibility system," contributed the bulk (over 5 percentage points) of the observed growth of crop production during the early-reform period (World Bank 1997). In Northern China, the household responsibility system contributed about 3.8 percentage points of the 7.6 annual growth of wheat during the same period.

It should be noted that, in China, investments in agricultural R&D predated the institutional reforms. Indicators of research intensity improved remarkably from the mid-1960s to the late 1970s (Fan and Pardey 1997). This could have improved the incentives of farmers to respond favourably to the institutional reforms. The same indicators show, however, that support to agricultural R&D has declined quite substantially since the mid-1980s. Real expenditures on agricultural research, expressed as a proportion of agricultural value added, fell from 0.41% in the early 1980s to 0.39% in the early 1990s. Spending per agricultural scientist followed a similar decline. While the decline appears to be in common with global trends (Evenson 1996), it raises the issue of whether agricultural growth in China is sustainable in the long term. Note that the economic rates of return to agricultural research are quite high in China - exceeding 70% -and are remarkably higher than what could be realized from most other public investments. Similar order of magnitude has been obtained for other developing countries (Evenson 1996).

To sum, productivity growth is - and will remain to be - the engine of food production growth in Asian countries. But for productivity growth to prosper, both allocative and technical inefficiencies in rural organization need to be addressed. Policymakers will have to give more cognisance of the effects of trade and macroeconomic policies on incentives in agriculture and rural areas. Farmers and rural folks in developing countries respond to economic incentives in much the same way their counterparts in industry and services in urban areas do. Their response is even stronger if price reforms are complemented by investments in public goods, especially agricultural R&D and rural infrastructure.

Consumption and demand response

Historically, the three main factors that have primarily influenced changes in food consumption at the national and regional levels are population growth, income growth (and its distribution), and food prices. These factors, of course, also operate at the household level, though the channels are not quite the same as those at the national level.

Asia's population, which accounts for about 60% of today's world population, grew at 2.3% a year in the 1960s, 2.1% in the 1970s, 1.7% in the 1980s, and (possibly) 1.8%% in the 1990s. Asia's population in the early 1990s was 1.4 times that in the early 1970s. But note that the growth decelerated in recent decades, reflecting a demographic transition that will, as noted below, have profound implications for future food security in the region (as well as in the rest of the world). Note, too, that the three "big" countries in the region - China, India, and Indonesia - account for 70% of the region's present population. Clearly, the issue of food security in the region cannot be divorced from the food policy concerns of these countries. Indeed, the Can-China-feed-itself-type alarm has attracted enormous attention from both within and outside the Asian region, including multilateral institutions.

Accentuating the alarm is the rapid growth of income in East Asia, particularly China and most Southeast Asian countries. These countries have seen their purchasing power doubled or tripled every ten or so years for the past three decades. In South Asia, income growth during the period was much less spectacular, though quite impressive vis-à-vis the average for all developing countries (see Annex 1). With policy reforms increasingly gaining grounds, these countries, especially India, have been posting respectable growth during the 1990s. India has, for the most part, been growing at 5-6%; Bangladesh and Pakistan are not far behind, with growth averaging 4-5%.

It is well known that the demand for food is rather income-inelastic, even in poor countries. Thus, food consumption, as a proportion of total household consumption, is expected to fall as per capita income increases. This is more apparent for grains, but less so for meat and dairy products, fish and fish preparations, and fruits. Apart from income, the structural transformation that usually accompanies economic development also profoundly influences food consumption. In Asia, rapid urbanisation is bringing about dramatic changes in diet and consumer behaviour, shifting preferences in favour of meat, dairy products, and fish but away from grains (Huang and Bouis 1996). In Japan, Taiwan Province of China and Korea (Rep.), direct per capita consumption of cereals declined, while indirect per consumption of grains rose, over the last three decades. The economic growth in China, India, and the Philippines, if it is sustained up to the next two decades, is likely to bring about similar pattern.

The combined effects of population growth and income growth on aggregate consumption are not as alarming as they have been portrayed in public discussions. The growth of world per capita consumption of grains in the 1980s was only 1.7% a year, compared to the 3.1% a year in the 1960s (Johnson 1996). The growth in the 1960s was only slightly higher than either in the 1950s and 1970s. The growth for the 1980s could have even been slower if real world prices of food did not decline sharply between the early 1980s and early 1990s. In short, as Johnson put it, "the worst is over - demand growth is slowing."

World population growth is expected to further slow down in the next few decades. The UN projects this growth to be around 1.7% a year between 1990 and 2025. In Asia, the growth is expected to be about 1.6% a year. Accompanying it will be a demographic transition, marked by falling dependency ratios and, hence, rising shares of the economically-active in total population. In East Asia, the demographic transition in recent decades enhanced growth in aggregate domestic savings (Higgins and Williamson 1997, Mason et al. 1997). High domestic savings rate is a sine qua non of sustained rapid growth (Feldstein 1995), which in turn, as discussed in section 2 above, represents the only major source of poverty reduction in the long term. Since the income elasticity of demand for grains is generally low (Huang and Bouis 1996), and is expected to further all in the future as income increases, the changes in future consumption arising from the anticipated slowdown in population are expected to dominate changes in demand due to per capita income growth. Indeed, building on the UN population forecast and historically-informed income elasticity assumption, Johnson (1996) estimates the increase in per capita grain consumption for the world at just less than 0.2% annually (and for the developing countries at just about 0.5% a year or 16% for the next three decades) during the next two decades. Much of this growth will come not from direct human consumption of grain but from indirect consumption through the growth of demand for livestock products.

Box B

China's Food Supply-Demand Prospects

Recent years have witnessed a preponderance of studies on the prospects of China, the world's most populous country, to feed itself in the next millenium. While some observers foresee impending disaster despite the rapid growth of the domestic economy during the last 20 years, most serious studies indicate that the country should be able to provide for the food needs of its huge - and still growing - population. Moreover, while China's imports of grains will probably rise over the next several decades, increases in supply from major grains-exporting countries will likely dampen any upward pressure on long-term world prices that these imports will exert on the world grain market. For this reason, the rise in China's imports is not expected to threaten food security in other food-importing developing countries.

The China paper in this volume (see Annex 3) uses heretofore the most comprehensive model of the country's food economy to validate the prospects for food demand, supply, and trade in the first two decades of the next century. The model incorporates behavioral supply and demand responses informed by recent data, as well as current government policies on agriculture. Assuming current trends in agricultural price policies, public investments, and the macroeconomic environment to continue well into the next two decades, the projection model shows that the annual rate of production will continue to fall behind that of consumption, suggesting rising grain deficits. The decade-end results (in million metric tons) are summarized below:












Net Import




The paper's forecasts of net imports are generally consistent with those of the World Bank (at least up to 2010), although somewhat higher than those of IFPRI and FAO (see Peng et al., 1987). As expected, the different results reflect somewhat widely differing views and assumptions about critical projection parameters, particularly rates of yield growth, amount of land subject to intensification, and income growth.

Simulation results suggest the critical role of agricultural research investment in China's food economy. Apart from income growth, this factor exerts the most influence on the country's net trade position for grains. For example, if the rate of growth of agricultural research (and irrigation) investment increases by one percentage point from a baseline level of 4 percent, China's net trade position would shift from a net importer to a net exporter by 2020. If, instead, investment falls by one percent, China's 2020 production would fall far short of demand and net imports would be approximately twice the baseline projection. Thus, the key to maintaining food security in China well into the next millenium is sustained agricultural productivity growth. In recent years, investment in agricultural research is the single most important source of this growth.

Interestingly, other food balance projections (World Bank, FAO, IFPRI) show remarkably similar insights on the demand side. There are marked differences in projections on the supply side, partly arising from vastly different assumptions on critical projection parameters, such as rate of increase in biological cereal yields, amount of land available for cultivation, irrigation possibilities, and environmental stress (Peng et al. 1997). But on the whole, these projections indicate no food supply difficulties for the Asian region in the foreseeable future.

It thus appears that population and income growth do not pose a serious threat to future food supply availability. These aggregates, however, gloss over the substantial differences in the food entitlements of developing Asian countries owing partly to the differences in the initial conditions facing them (factor endowment, quality of governance, trade regimes, institutions). Even within a country, food supply availability (and stability) does not necessarily translate uniformly into food demand stability for the various population groups, administrative regions, or geographic areas. As history of famines demonstrate, food availability and unstable supplies explain a minor part of severe food-security-risk situations (Sen 1981, Ravallion 1997). On the other hand, food demand fluctuations, with or without significant instability in supplies, can induce severe "price spikes" for food. This can occur, for example, if economic expansion is benefiting only the poor groups in one region but not the poor groups in another region. The rise in the demand for food of the groups benefiting from the expansion will exert an upward pressure on food price, thereby threatening the food entitlement of the groups not benefiting from the expansion. The root cause of price spikes is usually either poor state (or lack) of infrastructure or inappropriate policies (e.g., high tariff or non-tariff barriers to support self-sufficiency objective), or both.

Off-farm response and rural development

For developing economies facing land constraint and fast-growing labour force, the growth of rural nonfarm activities (RNAs) holds the key to sustained rural poverty alleviation. A gauge, albeit imperfect, of the importance of RNAs in Asian rural economies is the share of nonfarm income in total household income. In recent years, this share was about 35% in Southeast Asia and 29% in South Asia (Reardon et al. 1998). In East Asia, where conditions were favourable to the emergence of RNAs, even agricultural households became increasingly dependent on nonfarm incomes in the course of agricultural modernisation.

In developing economies where there is a high share of population in rural areas and where urban-rural links are nascent, the rural nonfarm economy is very much linked to agriculture, and rural nonfarm income is very important to food security and risk management. In these economies, the main stimulus to rural industrialization-led poverty alleviation is agricultural growth. Increases in agricultural productivity and farm incomes stimulate the growth of nonfarm activities and, hence, employment opportunities. Put differently, while agricultural growth reduces rural poverty and food insecurity directly by increasing agricultural incomes, the indirect effects of this growth on the rural nonfarm economy through demand and supply linkages could represent even more important sources of food security and rural poverty reduction in the long term. Indeed, improvements in the living standard of the rural population have been commonly associated with these linkages (Ranis and Stewart 1993, Lipton and Ravallion 1995, Mellor 1995).

The experience is, however, not uniform. Some rural areas, such as those of Indonesia and of India's Punjab, have responded strongly to agricultural growth, while others, such as those of the Philippines, have not (see Box C). Even within a country, large disparities in rural performance are evident [see, e.g., Datt and Ravallion (1995) on India]. These disparities have to do largely with differences in initial conditions across countries or locations within a country, i.e., the distribution of physical assets and incomes, quality of human capital, rural infrastructure, and macroeconomic and political environment (including the degree of openness to trade).

The emergence of local demand for nonfarm goods and services, partly stimulated by agricultural income growth, forms a major stimulus for the rise of rural industries. As household studies show, nonfood demand is bound to rise faster than food demand as income increases (for staples, the income elasticity of demand becomes even negative at some income levels). The more equally distributed are the benefits of agricultural income growth, the greater is the stimulus on local demand for rural nonfarm goods and services. Put differently, the more unequal is the distribution of benefits of agricultural growth, the smaller is the size of the employment multiplier effects of growth on the rural economy despite the rise in local demand (since labour intensity is lower), all other things remaining the same.

In addition to local (rural) demand, exporting to urban areas (or to the outside world) offers additional avenue for rural growth. Enterprises targeting at exports may choose to locate in rural rather than in urban areas, depending on relative cost advantages of locating industrial production in rural areas. It is safe to assume that labour is cheaper in rural than in urban areas. However, labour-cost advantages would have to be weighed against higher transaction costs arising from generally poorer state of infrastructure and human capital in rural areas.

Box C

Initial Conditions and Rural Performance: Philippines and India

The contrast in rural development experience of the Philippines and India offers an excellent illustration of the importance of initial conditions, including policy regime, to the character and pattern of rural poverty.

The Philippine Case

While agricultural growth faltered in the 1980s and early 1990s, the agriculture sector in the Philippines performed remarkably well vis-à-vis other developing Asian countries from the second-half of the 1960s to the late 1970s. However, during this period, the ranks of the unemployed and the underemployed continued to swell, real wages persistently fell, and the incidence of rural poverty remained high and seemed unaffected by the rapid agricultural growth then taking place.

Before and during the high-growth period, small farmers received less attention and support from government in comparison to large farmers and agri-business enterprises. Benefits of public investment in agricultural research, input and output subsidies, and infrastructure accrued disproportionately to the large-size farms. Public spending was heavily biased in favour of urban areas. The unfavourable effects of foreign trade and payments restrictions, the low interest rate policy, and the effective rationing of institutional credit impinged much more heavily on small farmers. These factors have contributed to the failure of rapid agricultural growth observed during the period to be translated into poverty reduction and sustainable economic growth.

How would the Philippine economy have fared during the green-revolution period under conditions more favorable to small-farm agriculture? Bautista (1997) has examined this issue using a modified Social Accounting Matrix (SAM) framework which allows for interrelations among production, household expenditures in rural and urban areas, household incomes, and the macroeconomic linkages of sectoral activities. In his policy experiment, government investments and subsidies are assumed to be redirected to small farms, thereby raising productivity and value added for these farms. He found that poverty reduction and economic growth in the Philippines would have been substantially higher than what was actually achieved. The counterfactual experiment leads to a gain in the real incomes of small farmers and a reduction of those of large farmers. What is even more remarkable is that incomes also increase relative to the base model for other rural households as well as urban households, though at a descending order of magnitude.

The Indian Case

Indian states with substantial farm yield increases from the late 1950s to the early 1990s tended to have achieved more rapid rural poverty reduction than those states with sluggish yield growth performance. However, this alone would account for only a small part of the explanation for the relative successes and failures in rural poverty reduction across states of India (Datt and Ravallion 1995). Initial endowments of infrastructure and human resources, together with state development spending, played a major role. Specifically, higher initial irrigation intensity, higher female literacy, and lower initial infant mortality have contributed to higher long-term rates of consumption growth and poverty reduction in rural areas.

The Indian experience also shows the quantitative importance of rural economic growth to national poverty reduction. Growth within the rural economy contributed the bulk to national poverty reduction in India during the last three decades (Ravallion and Datt 1996). Rural growth, led by agricultural growth, benefited the poor in both rural and urban areas. By contrast, urban growth in India had adverse distributional effects within urban areas, which militated against the gains to the urban poor. Urban growth did not also benefit the poor in rural areas. Thus, it appears that fostering the conditions for growth in the rural economy must be considered central to an effective strategy for poverty reduction in India.

As experience in Taiwan Province of China and parts of Asia bears, subcontracting offers an important route to rural industrialization for poor countries, or areas within a country (Hayami 1998, Otsuka 1998). This involves an urban-based enterprise contracting rural-based enterprises to produce the output at agreed-upon unit price, volume, and quality. But high transport and communication costs may substantially reduce the opportunity for subcontracting, hence weakening the linkage between urban and rural areas and between agriculture and the rest of the rural economy. Thus rural infrastructure is crucial to the success of rural industrialization efforts.

The availability of rural entrepreneurs is also critical to the growth of rural industries. In order for rural products to compete effectively with urban products, rural enterprises must have the capacity to adopt to changing technologies and demands. Hence, the importance of investments in human capital in rural areas cannot be overemphasised.

To sum the Asian experience, broadly based rural growth anchored on technological progress in agriculture holds the key to sustained poverty alleviation in developing countries where poverty is mainly a rural phenomenon, the poor are dependent mainly on agriculture for income, and urban congestion and rapidly rising labour force and unemployment are threats to social cohesion and stability. This type of growth requires that the initial conditions of rural areas for many of these countries would have to be made more favourable than what they were in recent years. Strong response of rural nonfarm areas (as well as urban areas) and, hence, of rural poverty to the stimulus provided by agricultural growth, as well as to export and/or urban demand growth, requires investment in rural infrastructure to lower transaction costs, removal of public-spending biases favouring large farmers and agri-business enterprises (and discriminating against small farmers), adoption of commercial policies supportive of small- and medium-scale enterprises, improvement in access to land and technology, and macroeconomic and political stability.

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