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Chapter 7. Globalization and the traditional role of agriculture[124]

“A key theme that emerges is that agriculture potentially benefits more proportionally than other sectors but also suffers more from constraints to benefiting”.

7.1 Introduction

Globalization refers to increases in the movement of finance, inputs, output, information, and science across vast geographic areas. The gains from globalization increase net income in many places and facilitate decreases in levels of poverty and may thereby increase levels of food security. However, there is an implication of frictionless movement and perfect knowledge that understates the requirements for benefiting from globalization.

These trends have been underway throughout history. As reflected in the previous chapter, they have moved unusually rapidly in recent times because the cumulative breakthroughs in basic science have allowed an extraordinary acceleration in the reduction of transfer costs. Real costs of information transfer and shipment of goods have declined rapidly, while perishability and bulk have been drastically reduced. Concurrently, increases in per capita income in many regions, and in the total size of the market, have allowed scale economies to be achieved for myriad new products, most of which involve value added processes that themselves require investment and improved technology. These rapid changes have allowed a great increase in specialization in agriculture, and consequently lower costs and rapid growth in trade.

Globalization can greatly enhance the role of agriculture as an engine of growth in low-income countries by making it possible for agriculture to grow considerably faster than domestic consumption. It also increases the potential for agriculture to increase food security through enlarged multipliers to the massive, employment-intensive, non-tradable rural non-farm sector. With such potential benefits, it is important to understand what is required for participation and to ensure that the poor and hungry are lifted out of poverty and hunger by these processes.

7.2 Competing in the context of globalization

Three features characterize competing in the current globalization context:

Cost reductions in one place have immediate impacts in other places

Cost reduction and associated production increase constantly occurs in agriculture, and the pace is accelerating, partly due to the forces of globalization. Thus, lower prices are often rapidly transmitted to producers who have not participated in cost reduction. If they have not experienced cost reduction in other endeavours either, they will experience a decline in income, eventually reverting to minimum subsistence agriculture. All too many of the least-developed countries fall into this category. They become poorer and more food insecure.

Cost reduction largely derives from technological advance

Cost-reducing technological change is the product of applied research, which increasingly depends on constantly advancing basic research. Low-income countries that are not rapidly expanding and improving their agricultural research capacity will not experience cost reductions and hence as others reduce costs, and prices decline, incomes of the non-innovators will decline. Nowhere is this more dramatic than in Africa, which has suffered from increasingly efficient production of first oil palm, then cocoa, and now coffee from Asian countries that have been spending on research. Benefiting from research is now far more complex than a few decades ago.

Basic research is moving far faster than ever before, constantly changing the context for applied research. Private firms are responsible for a much larger absolute and relative share of agricultural research than in the past. To benefit from modern biological science, complex relations between low-income and high-income countries must be developed and even more complex relations between private sector and public sector research. The first requisite for benefiting from research externalities is a strong national research system. Rate of return analysis shows that all low-income countries are vastly under-investing in applied agricultural research, particularly Africa. For low-income countries, the role of the Consultative Group on International Agricultural Research (CGIAR) should become far more important than in the past as a link to basic research, private sector research and high-income countries.

Well operating markets in low-income countries are concentrated in major cities with reasonably good physical infrastructure and hence at least moderate transaction costs. Undertaking international trade is constantly decreasing in cost. Thus major urban markets in low-income countries are increasingly open to foreign competition. Agricultural production in these countries takes place in rural areas that are frequently deficit in physical infrastructure. Hence foreign sources of competition may face low transport costs while domestic producers in low-income countries may face high transport costs. Such costs are reduced by investment in physical infrastructure - most notably roads, but also communications. However, improved infrastructure also facilitates the movement of imported goods further into the rural economy, posing the threat of increased competition to local production.

Globalization has greatly increased the returns to roads and consequently radical to reductions in costs. Rural roads in low-wage, low-income countries can be built with over half the cost in labour and roughly half the cost represented by the food consumed by labour from their wages.

WTO rules constrain the extent to which countries can protect themselves

Created to facilitate the processes of globalization, the WTO works to reduce trade barriers and to enforce agreed rules. However, the protectionist measures of the past are being allowed to continue in high-income countries, whilst many low-income countries are opening their borders to, often subsidized, imports.

7.3 The commodity composition of agriculture

Globalization has allowed agricultural production to grow much faster than in the past. A few decades ago fast growth was somewhat over 3 percent per year. Now it is 4 to 6 percent[125]. However, these higher rates of growth involve a substantial change in its composition. The bulk of growth initially came from basic food staples when the scope for export markets is limited, whereas there is now a swing towards much higher value commodities. Explosive growth in income of high-income countries means that large aggregates of production can now occur in what were previously small niche markets. High quality coffee and tea are examples. The market for horticulture exports has also grown immensely and can continue to grow.

As exports of high-value agricultural commodities increase and the multipliers to per capita income develop, domestic demand for high-value livestock and horticulture will increase rapidly[126]. Thus, even in quite low-income countries, around half the increments to agricultural production will be in high value horticulture and livestock for both export and domestic use. As a result, the role of cereal production will become relatively less important.

As the production mix moves more towards export crops and high-value crops and livestock, the rate of return to investments that reduce transaction costs will increase rapidly. The same is true for investments in all the value-added enterprises. There is however a caveat on value added. Much of such activity is through capital-intensive processes. There are also complexities in marketing. Both will give comparative advantage to high-income countries. Low-income countries need to pay attention to comparative advantage at every step in the chain from producer to consumer and should not attempt components in which they lack a comparative advantage.

Cereals play an important role in food security in a global economy. The cost of shipping is declining. Two forces in developing countries may lead to increased cereal imports. First, globalization and specialization may lead to an increase in the area planted to high-value commodities and potentially result in a decline in the area planted to cereals if either increased intensity of production (i.e. double cropping) or extensification are not possible. Second, any shift of income distribution towards the low-income, food insecure, will shift the demand schedule upwards. Thus, low-income countries may be beneficiaries of declining cereal prices, even while they lose from declining prices of other agricultural commodities.

7.4 Converting the benefits of globalization into food security

A major element in ensuring food security is increased incomes of poor people. The marginal propensity of the poor to spend on food is high. The primary means by which low-income people increase their incomes and hence their food security is through increased employment.

It is agricultural growth that reduces poverty[127], and agriculture’s impact is dependent on growth rates that are considerably higher than population growth rates. The latter are indirect, working through their impact on the demand for rural non-tradables that occupy a high proportion of the total labour force and the bulk of the poor, food insecure[128].

The great majority of persons below the poverty line work in the rural non-farm sector. They include many with a small tract of land that is insufficient to provide minimum subsistence. The rural non-farm sector uses very little capital and hence is highly employment-intensive. It produces goods and services that are dominantly non-tradable, that is they are dependent on local sources of demand. Agricultural growth is the underlying source of that demand growth.

The agricultural demand shows strong growth multipliers since the rural non-farm sector also tends to spend substantially on itself. This sector is highly elastic in supply, as would be expected of a labour-intensive sector in a low-wage economy. The supply of rural non-tradables is highly elastic, mainly because labour is the primary input and labour is elastic in supply as long as incomes are low or underemployment is endemic. It is demand that constrains growth of the sector[129] and that demand comes from high agricultural growth rates.

That the impact of agriculture on poverty is indirect is consistent with the three or four year lag noted before the full impact on poverty. That it works through the rural non-farm consumer-goods sector is consistent with the finding that agriculture has little impact on poverty decline when land distribution is highly unequal- usually associated with absentee landlords who have quite different consumption patterns from those of peasant farmers.

For a major effect on employment, agriculture must grow substantially faster than population growth. If it is to grow at the 4 to 6 percent rates required for achieving employment levels essential to food security, then major components of agriculture must be exported. This will include the traditional bulk exports such as cotton, coffee, tea, oil palm, and non-traditional exports including horticulture. Globalization requires constant reduction in costs through research and its application as well as constantly declining transaction costs through constantly increasing investment in rural infrastructure. Without these a nation cannot compete: it is no accident that it is African nations that suffer the most from declining commodity prices.

Below, the urgent requirements for low-income countries to benefit from globalization are presented.

Opening the economy to trade and market forces

The benefits of globalization flow from trade. Exports require imports, but trade restrictions tend to drive up the cost of exports through higher costs of vital inputs and technology. Comparative advantage needs to be seen for each component of a supply chain, not just for the final product. Customs inefficiencies and corruption and a myriad other bureaucratic constraints are just as stifling as tariffs and all need to be dealt with. However, opening to global market forces does little good if costs are not being constantly reduced. Put differently, if the result of global forces interacting with domestic investment and policy is to leave comparative advantage with subsistence production, no amount of opening of markets will help.

Investing in agricultural research and dissemination

Low-income countries need to invest far more than at present in agricultural research and technology dissemination. Without such investment, opening markets will do little good for agriculture and hence for poverty reduction and food security. Identifying supporting mechanisms such as research and training to minimise the exclusion of small resource poor farmers from value chains is also important.

Investing in rural infrastructure

Given the deplorable state of rural infrastructure in low-income countries, massive investments are needed Investment in other economic risk reduction services such as insurance, irrigation, storage are also likely to be required. Lack of such investment gradually shifts comparative advantage back towards subsistence production at very low-income and little multiplier to the rural non-farm sector. Winters[130] notes that “the transaction costs of trade with remote villages are often so great that it can be cheaper for grain mills to buy from distant commercial growers than from small farmers located in the region.” However, improved infrastructure also lowers the final cost of imports in the producing areas.

Facilitating private sector activity

All too often forgotten in these days of removing public sector constraints is the role that the public sector plays in conjunction with the private sector, especially in exports. It is not enough to remove bureaucratic constraints. Private sector investors in low-income countries tend to search for quick turnover, particularly in trade. Initially, governments have to play a role in assisting the private sector by participating in the costs of market analysis, assisting in the development of trade associations that can diagnose needs, developing and enforcing grades and standards, meeting health regulations of high-income importers, diagnosing special niche markets and carrying out analysis of constraints. In the case of most low-income countries, such efforts are sometimes financed by foreign aid programs, in a sense acting as public sector. Such efforts need to facilitate private sector action and gradually low-income countries need to play that role themselves, rather than relying on foreign aid.

7.5 High-income country assistance in the context of globalization

High-income countries must play a major role in ensuring access to the best of modern science to low-income countries. That calls for greatly expanded support of the CGIAR system and prodding the system into playing a lead role in linking advanced biological science in high-income countries with the needs of low-income countries, as well as bringing private sector research to low-income countries and engendering cooperation.

High-income countries must also open their markets to low-income countries, particularly for high-value crops. They should work with low-income countries in meeting phytosanitary rules and other obstacles to trade. They must also ensure that farm income transfers do not depress world prices. High-income countries must see that their measures to transfer incomes to their farmers do not result in downward pressure on world prices and reduction in markets for low-income countries. Delinking payments to farmers from prices is not sufficient, although it is a necessary condition. Payments to farmers keep resources producing that would otherwise be withdrawn serve to depress prices. Withdrawing land from production as part of payments and making payments that encourage lower yields per hectare and per animal, would also help meet environmental objectives.

Lower cotton prices are a disaster for low-income cotton producers and lower vegetable oil prices are similarly a strong negative factor. Reduced livestock prices are a particularly onerous burden on farmers of low-income countries with little mitigating benefit. The Doha Round should be used to obtain agreement from high-income countries to reduce support payments to farmers. This might roll back some of the recent excesses.

While production-increasing policies for cereals hurt some countries, they in general benefit the food insecure. These people are almost always net purchasers of cereals, so lower prices are helpful to them. Low-income countries are increasingly importers of cereals, and will be more so as the area devoted to high-value commodities is expanded. Thus, cereals are a special case, and as explained below could be used in the context of building rural public works.

High-income countries should provide financial support for a massive programme of rural public works. Calculations for Rwanda show that in a context of expanding rural employment (by 14 percent) and domestic agricultural production to meet major rural infrastructure needs, demand for basic food staples would expand 9 percent more than supply. That would bring about a roughly 30 percent increase in domestic prices of basic food staples, which are largely non-tradable in Rwanda, because of quality and transaction costs. This would be a disaster for poor people. Thus, a massive rural public works programme would require imports of cereals roughly equal to 9 percent of domestic basic food staples production. Such a programme on an Africa-wide basis would absorb the bulk of excess production of cereals in the high-income countries. It follows that a massive food-aid programme in the context of rural infrastructure development would be an important contribution of high-income countries, particularly in the context of their domestic farm-support programmes.

7.6 Conclusion

Globalization, in the sense of rapid transmission of the impact of technology to all areas of the globe with highly developed infrastructure, will continue to accelerate. Low-income countries that do not spend heavily on research and technology dissemination and do not upgrade their rural infrastructure and reduce transaction costs will experience continually declining prices for agricultural commodities, but without offsetting decreases in costs of production.

In contrast, where costs are reduced by research and improved infrastructure, agriculture can attain growth rates of at least 50 percent higher than in the past. That would have powerful multipliers to the rural non-farm sector, thereby reducing poverty, increasing employment, and increasing food security.

High-income countries can assist this process though continuing to open trade in agricultural commodities; preventing domestic farm support programmes from dumping commodities on world markets; and, in the case of cereals, massively increasing demand through financing rural public works programmes to reduce transaction costs in rural areas and bring them more fully into the global market. Low-income countries, especially in Africa, must redirect public expenditure to agricultural production, especially research and rural infrastructure. They should reduce constraints to trade, including over valued exchange rates, and consider cutting customs barriers.

[124] This chapter is based on a paper by John Mellor, The Impacts of Globalisation on the Role of Agriculture presented at the Expert Consultation on Trade and Food Security: Conceptualizing the Linkages. 11-12 July 2002, Rome.
[125] Mellor, J. 1992. Agriculture on the Road to Industrialization, Johns Hopkins University Press, Baltimore.
[126] Mellor. J. 1992. op cit.
[127] Ravallion, M. & Datt, G. 1996. How Important to India’s poor is the sectoral composition of economic growth, The World Bank Economic Review, vol.10, no.1; Timmer, C.P. 1997. How well do the poor connect to the growth process? CAER Discussion Paper No. 178, Harvard Institute for International Development, Cambridge, December.
[128] Mellor, J. W. 2002. Productivity increasing rural public works - an interim approach to poverty reduction in Rwanda, Abt Associates, Inc, Bethesda; Mellor, J. W. 2001. Rapid Employment Growth and Poverty Reduction: Sectoral Policies in Rwanda, Abt Associates, Bethesda.; Mellor, J. W. & Ranade, C. 2002. Modeling Egyptian employment with a three sector model, agriculture, non-tradables, and urban tradables, Abt Associates, Mimeo, Bethesda.
[129] EQI. 2002. A study of SME’s in Rural Egypt published by Abt Associates, Bethesda; Mead, DC. and Liedholm, C. 1988. The dynamics of micro and small enterprises in developing countries. World Development, Vol. 26, no. 1. pp. 61-74
[130] Winters, L. A. 2000. Trade liberalisation and poverty. Brighton: University of Sussex.

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