Posted July 1996
by Ammar Siamwalla
President, Thailand Development Research Institute
See also: Environment Specials
This paper looks at the national context, because that is where policy is made. However, we shall attempt to locate agriculture within an economy-wide context. To make our point more cogently, we have chosen to focus on East Asia, where agriculture is increasingly marginalized from a developmental point of view. This last statement needs considerable expansion and justification, and this will be the task of the next section.
It is an article of faith among agricultural policy analysts of an earlier generation that getting agriculture to move is absolutely essential for the overall development of the economy. This view has considerable degree of validity at a certain stage of economic growth. However, beyond that stage, the problem of agriculture becomes different. We need to examine the problems faced by rural people when growth in the non-agricultural sectors of the economy takes on a life of its own, and the umbilical cord that binds these other sectors to agriculture is severed.
Obviously, this is not a new problem in world history. Most developed economies have gone through this stage, and in certain respects have shown the way for the more advanced developing countries, say, in East Asia. A large literature on these issues exists, particularly in the U.S., mostly as apologias for public subsidies to agriculture. Nevertheless, I submit that certain features that arise in East Asian industrial growth have no parallel in Western economic history, and an elucidation of these would help pave the way for a better understanding of the problems that are now faced by Asian agriculture.
It is by now a commonplace observation--a paradigm--that those East Asian countries that succeed do so by taking advantage of their status as technological followers to boost their total factor productivity, and, once that has been achieved, they rely mostly on the world market as the sink for the increased outflow of goods. This model marginalizes the role of agriculture on both the technology and the market aspects.
On the technology side, the model focuses exclusively on the countries' capabilities in importing industrial technology. Industrial technology is widely believed to be far more footloose than agriculture. Although its absorption and mastery is a non-trivial task for most developing countries, once a cadre of people are available to handle it, the growth in productivity can be dramatic, far more dramatic than can be achieved by the agricultural sector of most countries.
Once the manufacturing-led growth process is under way, the disposal of the goods that stream out of the new industrial plants can be taken care of by making as full a use of the world market as possible. This use of the world markets is in contrast to the conventional view that a vibrant agricultural sector is needed in order to provide the market for industrial products.
Clearly, this model sidesteps agricultural development as a necessary condition for economic growth. It is not needed to provide food for the urban sector, as that can be procured by importing financed by the export growth that becomes a new necessary condition. It is also not needed as a market for the industrial products, as we have already indicated. It may once provide capital for the manufacturing sector, either in the form of forced or voluntary transfer, but with a much more mobile capital market globally today, that need is also questionable.
The discussion of the role of agriculture as a source of capital (or labour) brings out an important point. When all is said and done, the central reason to get agriculture moving is simply because in most low-income developing countries, agriculture is a very large sector that utilizes most of their capital and labour, as well as all of the land. For these economies to propel themselves forward in the earlier stage of development, it is hard to see how the agricultural sector can be ignored, as that will make a more important contribution to the total productivity of the economy than an as yet minuscule industrial sector. Most agricultural development treatises in fact point to the historical experience of Japan, Korea and Taiwan when agricultural productivity was advancing rapidly, and suggest that even in these resource-poor but otherwise very successful economies, agricultural development (and taxation!) was given pride of place by policy-makers.
It seems to me that the important research question is to ask at what point in a country's growth can agricultural development be ignored without undue harm, and industrial growth can become autonomous self-sustaining. It is beyond the scope of this paper to answer this question, but I would nonetheless like to offer up five possible hypotheses for investigation. The turning point may occur:
If agricultural growth is to cease to be the engine (or at least a necessary accompaniment) of economic growth, and if it has become merely a caboose of economic growth, what are the implications for the farmers, for agricultural policy and for researchers in the field of agriculture.
The main dynamic affecting agriculture in a country undergoing rapid industrialization arises out of the rapid growth in the total factor productivity within the industrial sector (currently estimated to be in the range of 2 to 5 per cent in East Asia) which is higher than can be attained in the agricultural sector. This faster growth in total factor productivity then acts as a magnet for capital to flow to the industrial sector. Both the higher total factor productivity and the higher capital accumulation in the industrial sector in turn cause the wage rate in the industrial sector to rise faster than incomes in the agricultural sector. The consequence of all this is that agriculture becomes nothing more than a pool of labour upon which the industrial sector can draw for a period of time.
In a closed economy, such rapid economic growth cannot be sustained, as the dwindling labour force in the agricultural sector will lead to a decline in agricultural production, and consequently to higher food prices and therefore higher wages (relative to prices of industrial goods). However, in an open economy, the increased food requirements of the growing cities can be procured internationally, financed by the sale of the industrial exports made possible by the same industrialization process that increased food demand. Without increased protection or increased productivity, agriculture would then be squeezed between higher factor prices (both for capital and particularly for labour) and at best constant output prices.
The same story can be told in another way. If industrial export was to expand rapidly--or at least more rapidly than imports of raw materials and food necessary to fuel it, then over a long period of time, one would expect real exchange of the home currency to appreciate. Tradeable agricultural goods which form the bulk of the sector's output would then be subject to this downward price pressure as well. From the point of view of agriculture, the rapid industrial export growth is a form of "Dutch disease".
The above account does not rely on Engel's law, because we are dealing with an open economy. Of course, the law still holds worldwide. There has been an inexorable pressure for real food prices to decline on a secular basis. This decline would impose an additional bind on each country's agriculture, unless it is insulated from the world market.
Rapid industrialization impose severe pressures on farmers and their families in rapidly industrializing countries, the first point that should be noted is that the withdrawal of labour from agriculture to industry does not take place in a balanced fashion. Industry's demand for labour is for young workers--in some countries mostly female. There are a number of reasons for this preference. First, the younger workers are more pliable. Secondly, where the number of years in school have been rapidly rising, younger workers are apt to be the better educated ones. (The second reason assumes that the marginal productivity of schooling is higher in industry than in agriculture).
Consequently, the outmigration from rural areas is mostly of the younger age group. This plays havoc with preexisting social arrangements in the villages. A prime example of such an arrangement (from Thailand, but also true for many parts of Asia) is the obligation of the farmers' sons and daughters to provide for the support of aged parents in exchange for a share of the land to be bequeathed by their parents. This support has traditionally been done by direct "tender loving care" of the children. It can only be partially replaced by financial remittances from them. The rural social problems entailed by migration of younger farm people to work in the factories have been particularly severe in some countries, where industrialization has in the past been highly localized around the major cities. Thus, the sustainability of what at one time was a working social arrangement is now in jeopardy.
The threat is not merely to social arrangements, but in some cases to agricultural production as well. In many Asian countries, investment in and maintenance of local infrastructure, particularly in water control, requires input from farm families. With increasing fragmentation of the rural households, the maintenance of such infrastructure comes under threat.
Within such a context, the temptation for the government to provide trade protection for agriculture is overwhelming. From the fiscal point of view and in the beginning, providing of protection is relatively painless, particularly in countries which would otherwise be net importers of the major agricultural products. Even in countries which are net exporters, such as Thailand, the pressure to provide price support is acute, although there are counterpressures arising out of budgetary constraints and, more recently, prohibitions in the GATT against new export subsidies that were not in place in the late 1980s.
The way out for agriculture other than via protection is not clear. For it must be one that is primarily aimed at older farmers, and that would entail private capital investments in one form or another. Past capital investments in Asian agriculture have been largely public investments, among which irrigation has been by far the most important, although it must be added that agricultural research is important, at least as far impact is concerned. But most of the new investments such as in livestock, in on-farm irrigation systems for horticulture, in land-levelling or in mechanization will have to be made by the farmers themselves.
Under the present circumstances, if these new investments are to be made, it will have to be made by farmers who are near the end of their life cycles. Most of them will probably not have the incentives to do so. The exceptions will be the few who are motivated to think of farming as commercial enterprises. In many East Asian economies, these are prevented from entering the scene by highly restrictive land laws, but where such laws do not exist, they will end up buying out their colleagues. To some extent, this transfer is facilitated by the fact that as the older generation of farmers die out, their children who would by then be more committed to the urban life would probably be more willing to sell their farms to these commercial operators.
The dilemma facing the government is therefore the following: whether to facilitate this process or to slow it down in the name of social farming. It seems to me that some of the social problems arising out of "de-agriculturalising" are not unsurmountable. In most instances, the problem can be considerably mitigated by ensuring that industries are well dispersed throughout the rural areas, and the means by which industries can be induced to move out to rural areas can be found, provided some judicious subsidization is involved. Taiwan has led the way in this respect, although the small size of the island may have facilitated this outward flow more than would be the case in a larger country.
A national policy-maker grappling with the problem of agricultural sustainability, has to bear in mind the performance of his country's agriculture vis-a-vis others', but he also has to place its industrial performance against the rest of the world as well. For a country that is rapidly industrializing, i.e. for a country which is by definition gaining in comparative advantage vis-a-vis the rest of the world, the sustainability problem for its agriculture is liable to be different from a country that continues to have the bulk of its labour force engaged in farming.
Within the Asian context, we may separate the problem into two components, the first deals with strains on conventional natural resources, such as land and water arising out of population pressure, and the other deals with the environment spillovers of extremely intensive farming systems, such as is practised in parts of Asia. The two sets of problems are of course not independent of one another. In the past they have evolved together as a consequence of the population pressure, but, as I shall argue below, their future evolution can be quite different.
Rapid industrialization of an economy, almost by definition, implies a decline in its comparative advantage in agriculture. The shift of labour and capital out of agriculture is but a reflection of that decline. To speak of a decline of comparative advantage in agriculture is of course an oversimplification. Agriculture, even crop agriculture, is a heterogeneous set of activities, involving the production of a diversity of goods, using a wide array of technologies. Even within a commodity subgroup such as cereals, the diversity is quite large. Consider, for example, the contrast in the production systems of rice and maize. Furthermore, a significant part of agricultural production, because of their perishability, consists of non-tradeables. For these commodities, considerations of comparative advantage play less of a role than for tradeables.
Prima facie, such a departure can be expected to lessen the strains on the natural resource base of agriculture that were imposed during the past five decades of rapid population growth in Asia. However, as there have been sometimes considerable distortion in the markets for these resources, and as some of these resources have competing uses outside of agriculture, there are issues which one has to bear in mind if these resources are to be put to further sustainable use.
Take for example the case of water. Almost everywhere in Asia, water is relatively underpriced, and almost everywhere agriculture is the main consumer of water (in Thailand, the share of agriculture in the use of water is as much as 90%). With burgeoning urban and industrial demand, there is a strong temptation to draw water away from agricultural uses. Almost everywhere the allocation of water, particularly intersectoral allocation is based on administrative decisions, dictated more by short-term annual considerations than the long-term sustainable use of the water. Sustainability issues are particularly acute in the case of groundwater. For those who believe in decentralized private decisions, we run into the problem that property rights in water are a poorly developed concept in Asia.
Yet it by no means follow that the supply of water to agriculture has to be guaranteed at the present level. At the existing level of uses and prices, the value of the marginal product of water used by industry is likely to be considerably higher than that in agriculture. Over time it probably makes better sense to draw water away from agriculture to provide for urban and industrial uses, but to do so in a way that ensures as efficient a use as possible in both agriculture and industry. Suggested solutions exist in the form of tradeable water rights for example.
The problem of land use is different from that of water, although here again one has to confront the issue of private property rights. Private property rights in general help to make land use sustainable from the point of view of the owners. Where such rights are insecure, there is underinvestment in conservation and land development. However, where there are externalities in land use (e.g. soil erosion from excessive cropping in watershed areas -- which may be privately profitable despite the soil loss -- leading to flooding in lower areas), private property rights may actually prevent optimal land use over time. In such cases private property rights may have to be constrained by zoning restrictions or other incentives for conservation activities. In some developed countries (for example in the United States, and increasingly, in the European Union), such restrictions and incentives arose out of attempts to support prices and are bound up with policies to limit agricultural production. Lessons from these could be useful for developing countries.
In countries where there is a severe shortage of land, the increase in city size will begin to take land away from agriculture. Urban land use planning is an accepted practice in all advanced countries, for aesthetic reasons and to minimise on infrastructure costs. Dovetailing agricultural with urban land use planning would be a reasonable proposition in such a context, but even in some advanced countries with severe land constraints, this appears not to have been done.
By contrast to the land and water resources, the issue of genetic resources may appear to be relatively minor, but even here some changes taking place in Asia should be noted. As far as the genetic resources of wild species of plants and animals are concerned, the issue is bound up with land use and can be considered within the same context. It is with domesticated plants that some interesting issues arise.
As agriculture becomes more commercialized, on-farm genetic diversity -- in the sense of varietal diversity -- has declined. For those crops for which there exist international gene banks, the problem is not really serious, although some legal conundrums have arisen as a result of the Biodiversity Convention. However, many countries grow crops that are specific to them, particularly in fruit and vegetables, much of which are non-tradeables and demand for which may be presumed to increase pari passu with income. As production of these crops has become commercialized, farmers have found it profitable to select for desirable traits and lessen the genetic diversity on their farms. Unfortunately, such farmers' selection is not back-stopped by good gene banks to conserve those cultivars that are being selected out. Consequently, there is some role for public investments in building up gene banks for such crops. Incidentally, public investment in agricultural research more generally has consistently been shown to yield extremely high rates of return, and can be made consistent with sustainable growth in agricultural production.
The rapid growth of Asian economies owes a great deal to the agricultural revolution bought about by the introduction of high-yielding strains of rice and wheat. However, one side effect of this development has been the increasing chemicalization of agriculture. Fertilizer use has affected water quality somewhat, but the order of magnitude of the problem is still small, excepting perhaps in China.
The same cannot be said of pesticide use. The effects of pesticide use on farmers' health is now well documented. Not so well documented is the impact of pesticide use on consumers' health, although horror anecdotes do crop up from time to time. The main problem here lies in inadequate controls on chemical residues on food reaching the markets -- a problem made somewhat intractable by the myriad channels of food marketing typical in most Asian countries.
These are some of the more obvious impacts of chemical use in agriculture. Less obvious is the long term impact of excessive pesticide use, as insects and other pests evolve resistance to some of the chemicals. Even introduction of the relatively benign concept of host plant resistance leads to the same consequence, requiring constant "maintenance research" to keep up with the evolving pests. The alternative presently mooted is the integrated pest management (IPM) approach. This approach is intensive in both labour time and human capital (i.e. management skills). The latter may over the years become increasingly available, as Asians are getting more schooling (although the outmigration of the better schooled will mean that the improvement of human capital in agriculture would be somewhat slow). However, labour time is becoming increasingly expensive, and the detailed observations sometimes required in IPM may make pest control somewhat more expensive over the years, and unfortunately will appear to make chemical pesticides more attractive.
We have dwelt on the spillover effects of chemical-intensive agriculture. Not to be forgotten is the spillover effects of industry on agriculture. The problem of water quality deterioration in most Asian rivers arising out of industrial processes and urban household use is becoming more acute. This has deleterious effects not only on crop agriculture, but more dramatically on aquatic resources. Many Asian societies depend on fish as their basic protein source. There has already been a sharp decline of aquatic resources as a result of population pressure -- a decline that is being compensated to some extent by aquaculture. Regardless of whether the aquatic resources are harvested out of the wild population or on aquaculture farms, the quality of water needs to be maintained.
The classical problem of agricultural development in poor countries has been to procure enough food to feed the population and to leave some to spare to finance the growth of other sectors of the economy. As some Asian economies have become less poor, new problems have emerged. It no longer makes sense to talk of sustainable agriculture by itself, as the sector itself is heading for a relative, and in some cases even absolute decline. What is needed is to conserve the resource base, not for agriculture alone, but for the economy as a whole.
Such conservation requires a more sophisticated policy analysis than one which aims to remove market distortions or improve the functioning of markets for ordinary goods. Because of the pervasiveness of spillover effects, government intervention is necessary, particularly in the context where markets for key resources (such as water) do not exist. Even if one were to introduce a market for water, it will not be as straightforward a problem as, for example, the removal of parastatal monopoly power on grain trade. Nor is it the case of throwing more investment funds into agriculture or rural development.
The emphasis for the next generation of problems of agricultural development would have to be the creation of new rules of the game at societies that are used to perceiving their problems in a different way. Where formerly local rules and customs can be assumed to take care of the problems of land and water rights, now national legislation will either have to take over or be devised to impose the rules of the game. Where informal methods once could be used to resolve disputes, a more adversarial legal framework will unfortunately have to come in to take its place.
The information requirements on the government will also increase, as it needs to grapple with these more sophisticated problems. Unfortunately, many of these problems will be quite location-specific, so that simple rules will no longer suffice.
Looking at the future tasks of public policy and planning, the major thrust will have to be in setting up new legal and institutional frameworks rather than on a better economic analysis, and on qualitative approaches rather than quantitative modelling.