Chapter 7 :Agricultural development in the economy-wide context: Approaches to policies and strategies

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7.1 Introduction
7.2 Evolution of thinking on agriculture and development
7.3 Macroeconomic environment and agricultural growth
7.4 Policy reforms and agriculture: the role of price and non-price factors
7.5 Lessons and policy implications: short-run adjustments and long-term strategies

7.1 Introduction

A careful reading of the academic and policy debate in the last decade reveals a shift in the formerly prevailing paradigm in economic development, with profound implications for policy making. The fundamental characteristic of the new approach to economic development is its emphasis on an expanded role of markets and of private initiative, and on a reduction and/or reorientation of the role of the state in the economy. The general thrust of this approach calls for the withdrawal of the state from those tasks that the market can perform efficiently, and the concentration of its activities on those tasks in which markets fail. The new approach is the result of several decades of accumulated development experience, and theoretical developments.

The disappointing performance of most developing countries during the 1980s (for some a "lost decade" for economic development) provided an impetus for a re-examination of the dominant development paradigm that emphasized market failures and advocated heavy government intervention. The idea of a different economic theory to apply to developing country problems lost its popularity, in favour of a "standard neoclassical" framework emphasizing maximizing behaviour on the part of economic agents (Fishlow, 1991).

In terms of developing country policies, the trend towards more market-oriented economic environment implies a shift away from inward-oriented import-substituting development strategies to more outward-oriented ones, and from the use of shadow prices derived from planning exercises to prices based on international opportunity cost of resources as guides for resource allocation.

As far as agriculture is concerned, the prevailing view in the 1950s and 1960s, i.e. that agriculture should be artificially "squeezed" on behalf of more dynamic sectors, is now largely rejected. The role of agriculture has been elevated from a sector destined to provide resources to foster industrialization, to a crucial sector for increasing export earnings, generating employment and improving food security.

Agricultural development presupposes integration of agriculture in the macroeconomy requiring a framework for overall economic policy guaranteeing: (a) stability of rules and signals for a decentralized calculation of gain and loss-a clear regime of property rights is quite essential in this regard; and (b) a government capable of identifying and providing socially productive physical and intangible capital that private markets cannot provide or can only do so inadequately, and catering for those social issues that markets either cannot solve by themselves or do so with long delays.

In what follows, a number of policy issues are examined which have as a common theme the interaction between agriculture and overall development mainly in developing countries, with particular reference to how the macroeconomic and institutional environments condition both agricultural performance and the effectiveness of sectoral (agricultural) policies. Within this context, attention is paid to the role of the public sector in shaping the economic environment of agriculture.

Section 7.2 discusses the evolution of theoretical perceptions on economic development and the exagenous (international) economic environment facing developing countries and how they influenced thinking about economic policies for agriculture. The objective is to learn from the analysis of past experience how policies for agricultural development and those for the overall economy can be made more mutually supportive.

Section 7.3 discusses the economic crisis of the 1980s and the economic reforms that several developing countries had to initiate as a result of the crisis. The fiscal, monetary and agriculture-specific policies are examined from the standpoint of their impact on both overall and agricultural growth during the period of economic crisis and adjustment. The methodological difficulties in evaluating the effects of policy reform programmes are discussed.

Section 7.4 examines the role of price, non-price and institutional factors for stimulating agricultural supply and growth. The question is to what extent and under what circumstances price reforms alone can promote private investment and carry the major burden of reviving agricultural growth. The types of interventions that are likely to promote or retard agricultural development are examined, with due regard to their effects on other objectives. Particular attention is given to the institutional and infrastructural problems prevailing in Africa, which may limit the effectiveness of price incentives in stimulating agricultural supply. Drawing on the experience of past policies, the role of the public sector is discussed with respect to several aspects of economic activity related to agriculture: provision of public goods and of a framework to facilitate market activity and increase private sector participation.

Section 7.5 draws some general conclusions for short- and medium-term policies on the basis of the analysis in the preceding sections. The discussion then shifts from short-term policies to long-term growth strategies. The realization that neglect for the agricultural sector has had negative effects on overall economic growth has given new impetus to agriculture-led development strategies. Two approaches to such strategies are critically reviewed. In turn, the implications of recent theorie of economic growth for agriculture and every agricultural for policies are examined, emphasising the importance of non-physical capital. The chapters ends with some general conclusions.

7.2 Evolution of thinking on agriculture and development

The 1950s and the drive for industrialization

During the period immediately following the Second World War, no readily available conceptual/theoretical framework existed to analyse largely peasant agrarian societies. Thus the background of the major intellectual contributions in development economics reflected the post-war economic policy thinking in developed countries. In turn, this was influenced by economic conditions and concerns in the developed countries, particularly by the need to mobilize and reallocate large amounts of resources for the rebuilding of Europe and to avoid 1929-like experiences. It was considered that these major tasks could not be entrusted to markets and price signals. Market adjustments were considered to be slow, and marketing institutions for inputs and outputs inflexible. Thus, direct participation of governments and the planning of the production/ resource allocation system were considered essential (Stern, 1989).

A stronger case in favour of government intervention and resource planning was made for developing countries where inflexibility in input and output markets (such as price rigidity and labour immobility) was assumed to be even more pronounced. At the same time, the perceived economic successes of the industrialization policy in the USSR and the simple observation that the then developed countries had undergone a transformation from mainly agricultural to mainly industrial economies, fuelled the drive towards industrialization. Empirical evidence demonstrated that inter alia the process of development had been characterized by a movement of labour from low-productivity agriculture to high-productivity manufacturing (Kuznets, 1955).

Capital and labour were perceived to be more productive in industry where economies of scale and external economies prevailed, rather than in agriculture which was subject to diminishing returns. Thus, it was suggested that policies to turn the terms of trade against agriculture could increase accumulation for investment, by shifting resources towards industry. As agriculture was thought to be relatively unresponsive to prices, transfers of agricultural surplus through this type of "taxation" could be made without sacrifices in agricultural output and in food availability to the urban sector.

The perceptions of the relative roles of agriculture and industry in economic development were strongly influenced by a number of theoretical and empirical contributions to the economic analysis of development. The existence of "surplus labour" in agriculture was well accepted during the 1950s. The presumed existence of surplus labour in agriculture meant that labour could be attracted from agriculture to industry without loss of agricultural output, and at low wages. The resulting profits in the capitalist industrial sector could be reinvested to increase capital and promote growth.

Another important reason for underestimating the role of agriculture as an "independent" source of economic development was the lower income elasticity of the demand for food compared with that for other products. If true, in the process of development, demand for food would grow more slowly than demand for non-agricultural goods. The implication was that agriculture would naturally decline relative to non-agriculture. It was furthermore asserted that there was a secular decline in the international terms of trade of primary commodities vis-a-vis manufactures, casting doubts on the potential role of agriculture as a foreign exchange earner. Therefore, a successful development strategy should be characterized by a move away from primary commodities and towards industrial products. As the demand for imported manufactures was considered to be price inelastic, the development of a domestic industrial sector implied a move from tariff-based measures to a regime of physical import controls of industrial goods to protect industry.

A number of contributions underlining the merits of a development strategy based on government-led industrial growth appeared in the 1950s. They emphasized the positive external economies (spillover effects) associated with industrial investment (as learning by doing, etc.). They also stressed the large number of linkages between industry and other sectors and the concomitant multiplier effects industrial development could have on the overall economy. As individual entrepreneurs could not take into account those secondary "external" effects in their calculations of returns on investment, simultaneous government-coordinated industrial investment planning needed to be undertaken by the state.

Thus, during the 1950s, development was tantamount to the transformation, with heavy involvement of the state, of low-technology/agriculture-based economies into modern-technology/industrial ones, and the role of development economics was to study ways to transfer surplus resources (labour, savings) and surplus production from agriculture to industry. The emphasis was on agriculture's role as a resource reservoir. The "agricultural transformation" process was interpreted as a process of resource transfers (mainly labour), to be achieved through changes in the terms of trade against agriculture and in favour of industry.

Restoration of agriculture as a key sector in the quest for economic development

As more data on developing countries became available in the 1960s, empirical evidence showed that freer markets, more liberal trade regimes and a growing agricultural sector were conducive to overall economic growth. It was demonstrated that export pessimism was largely unfounded, and that agricultural production and exports did respond to incentives (and disincentives). This "neoclassical resurgence" in development economics, particularly in its approach to international trade, agricultural policies and development planning, coincided with the decline of "enthusiasm" for planning in a number of countries. In parallel, the demographic projections of the 1960s showing rapidly increasing population in the developing countries gave rise to preoccupations with food availability in those countries, and generated a lot of discussion on the "World Food Problem" (Little, 1982). Agriculture's important role in overall development started to be recognized as it became evident that agricultural stagnation could choke off industrial development and cause food shortages and hunger. Hence the perceived need for more attention to the development of the agricultural sector (Jorgenson, 1961; Ranis and Fei, 1963).

Furthermore, the "false dichotomy of agricultural versus industrial development" was attacked, and agriculture was "elevated" by many analysts to an active source of economic growth. The important ways in which an expanding agricultural sector could contribute to economic growth included the provision of food and foreign exchange, transfer of labour and savings to the non-agricultural sectors and provision of an expanding market for the products of domestic industry (Johnston and Mellor, 1961).

The important new element in such a perception of agriculture was that resource transfers from agriculture occurring during the process of transformation should be effected as a result of agriculture's declining dependence on resources, i.e. as a result of growing productivity rather than as forceful extraction of agricultural surplus. This approach emphasizes a simultaneous effort to develop agriculture and industry through their mutual links.

During the 1960s the idea that peasants would not respond to economic incentives was tested using empirical data. The findings demonstrated the contrary, i.e. that farmers in developing countries do respond to economic incentives, allocate resources efficiently under existing technologies, and respond to profitable innovations provided that they are not too risky (Schultz, 1965). By the end of the 1960s it had become widely accepted that policies should primarily endeavour to enhance the opportunities for the above-mentioned rational behaviour of farmers to manifest itself and lead to increased production and improved productivity, e.g. by investing in research and extension, providing infrastructure, etc.

The 1970s: external shocks and the developing countries

The economic environment facing developing countries in the 1970s was shaped by a number of exogenous factors: (a) the two oil crises of 1972-73 and 1979; (b) the increases in commodity prices including the doubling of the world prices of cereals in 1973-74; (c) the shift to floating exchange rates after the breakdown of the Bretton Woods system and the ensuing volatility in world financial markets; and (d) the drastic increase in world liquidity, as oil exporting countries recycled oil revenues through commercial banks, and as developed countries in the early and mid 1970s attempted to "inflate away" oil price increases through money creation.

The combined effects of the oil shocks and financial market instability contributed to an economic slowdown and increased protectionism by developed countries after 1973, that subsequently led to a reduction in the growth of trade. Developing countries attempted to minimize the negative external effects on their economies by borrowing heavily and at favourable terms in the world financial markets to maintain high levels of domestic expenditure. Thus, even several oil importing countries were able to grow at relatively high rates despite an adverse international environment.

The "pro-agricultural shift" of the 1960s continued and was further strengthened in the 1970s. The strains posed by higher food and oil prices on the ability of developing countries to import food and a series of poor harvests brought about the prospect of an agricultural sector unable to feed and provide a living for the growing population. FAO's "Freedom From Hunger Campaign" in 1963 and the publication in 1970 of FAO's "Provisional Indicative World Plan for Agricultural Development" had increased the awareness of the problems facing agriculture and the rural sector and underlined the need to accord a higher priority to increasing food production. Increasing emphasis on poverty alleviation and social equity naturally directed attention to agriculture, as the majority of the poor live in the rural areas. During the 1970s, it was realized that the rapid development of the 1960s had made only a small contribution to poverty alleviation and that industrialization had not produced the expected results with respect to employment. The employment question was particularly acute in South Asia, Latin America and some African countries where landlessness was on the rise.

Although the linkages between agriculture and industry were recognized, the approach to agricultural development was driven by the urgency to increase food production and, as a result, was narrow, i.e. it was not placed within a framework of macroeconomic equilibrium and overall efficiency in resource allocation. The pro-agriculture development strategy of the 1970s focused on relaxation of supply constraints to food production, investment in agricultural infrastructure, extension and agricultural research and integrated rural development schemes to combat poverty.

In parallel, the drive for industrial growth through import substitution was on the decline. As world trade was expanding twice as fast as world production, countries could neglect export opportunities only at a high cost. In addition, evidence from research on trade and industrialization showed that countries with higher rates of export expansion showed higher GDP growth rates (Myint, 1987). The views that attributed export difficulties to failure of domestic policies to exploit comparative advantage started gaining ground.

In the industrial countries, the dominant thinking of the time emphasizing a "trade-off" between inflation and unemployment was seriously questioned. Industrial countries tried to counter the negative effects of the first oil shock on their economies by easing their monetary policies (monetary expansion). Such policies, while failing to prevent economic recession and unemployment, gave rise to severe inflation.

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